What's on the Horizon for the Global Economy?

Our view in a nutshell

Japan

• Japan’s economy will likely remain on a recovery path in line with potential of around 0.5% annualized.
• Higher US tariffs make us more cautious about the downside risks to Japan’s economy.
• The BOJ significantly revised down GDP and CPI forecasts in May, de facto accepting a delay 2% inflation.
• We expect the BOJ to hike in January 2026 and stay put thereafter, considering a possible slowing in wages in 2026.

Asia

• Tariffs, policy uncertainty and weak global demand are likely to slow Asia’s export and capex growth sharply in H2 2025.
• Open economies (Thailand, Singapore, Taiwan, Korea) are most vulnerable, while India and the Philippines are more insulated.
• Disinflation should sustain, due to lower oil prices, weak demand, and a redirection of Chinese exports to the region.
• The soft growth-inflation backdrop calls for a frontloaded and deeper rate cutting cycle in the region, with fiscal support also on tap.
• Korea: Amid worsening policy trade-off, we expect the BOK to cut only once more, in February 2026.
• India: Negative output gap and on-target inflation should lead to 50bp of further rate cuts, while trade diversion is a positive.
• Indonesia: Populist measures of the new government raise fiscal risks while current account deficits continue to widen.
• Australia: We expect modestly sub-trend growth and two more 25bp rate cuts, in August and November.
• New Zealand: With inflation near target and global uncertainty elevated, we expect another 25bp rate cut in July.

China

• The economy is on course for a steady expansion in the first half of this year, thanks to export front-loading and trade-in program.
• We see strong headwinds in H2, due to the payback of export and consumption front-loading, a high base, and the property fallout.
• The tariff truce and the potential revoked tariff could delay a sizable stimulus package and necessary structural reforms.
• Beijing might be compelled to ramp up policy support in H2, as it tries to achieve its “around 5%” growth target.
• Clearing the property sector should still be Beijing’s top priority.

United States

• Inflation data have remained benign lately, with no sign of broad tariff-induced pressures on goods prices.
• We continue to expect tariff induced inflationary pressures are likely to push up core PCE inflation in coming months.
• We continue to expect a 25bp cut in December, followed by back-to-back cuts in Q1 2026.
• We expect Congress to pass the tax and spending bill by summer, which is likely to be modestly expansionary in the near term.
• The labor market is slowing, and risks remain skewed to the downside. Gradual cooling is more likely than a sharp deterioration.

Canada

• We expect the BoC to deliver a 25bp cut in July 2025. A protracted trade war could lead to a deeper cutting cycle.
• Disinflation is likely to resume after the bump in the April CPI, as shelter prices continue to decline and wage growth eases.
• The unemployment rate is likely to remain elevated, while downside risks to growth due to tariffs have increased.

Euro Area

• While fiscal policy should be growth-positive in the medium term, higher tariffs make the near-term view more challenging.
• We see core inflation above target in 2025. There are upside risks from a tariff response, but downside risks from China.
• We believe the ECB will cut rates to 1.50% by December to support the economy in the face of the US tariff shock.
• The ECB began full roll-off of APP portfolio redemptions in July 2023 and PEPP portfolio redemptions in January 2025.

United Kingdom

• GDP growth lost momentum in late 2024, but was strong in Q1. Surveys point to slow growth in coming quarters.
• Downside risks: higher yields, weak confidence and a weaker job market. Upside risks: strong wage growth, US trade deal.
• Headline inflation is rising again, partly due to base effects and energy, but we see underlying price momentum slowing.
• After commencing the easing cycle in August 2024, we expect quarterly cuts until early 2026. Markets see a slower pace of cuts.

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