Trade: Recent trade deals have proven less favourable for US trading partners than we’d previously anticipated, though a lot hinges on whether pharmaceutical tariffs kick in. If they don’t, then the average tariff charged on the likes of the EU and Japan is only marginally higher post-deal than it was before, as the higher baseline 15% tariff is heavily offset by a reduction in car tariffs. In any case, tariff rates are significantly higher than at the start of the year.
United States: We expect US inflation to rise more aggressively over the summer as the lagged impact of tariffs hits prices. But this is likely to be short-lived as service-sector disinflation increasingly dominates. The latest jobs data puts the Fed at serious risk of slipping behind the curve, and barring a dramatic improvement in the next labour market report, we now expect the Fed to cut rates in September. We expect three cuts in 2025 in total and another two in early 2026, which is more aggressive than markets are pricing.
Eurozone: While the US-EU deal is far from ideal, it does provide a degree of stability, at least for the time being. We don’t expect any economic contraction in the second half of 2025 and have slightly upgraded our growth forecast for this year and next. That has complicated our ECB call, of one further rate cut in September. But falling inflation still narrowly argues in favour of one more move.
China: China’s economy outperformed expectations in 1H25, growing 5.3% year-on-year. Exports remain solid and consumer spending has bounced back, but that’s offset by weak private investment and a struggling property market. Thanks to strong first-half numbers, a likely US-China trade truce extension, and continued policy support, we’re upgrading our 2025 growth outlook to 4.9% from 4.7%.
United Kingdom: The economy is under pressure from recent tax and national living wage hikes, and the jobs market is visibly cooling. However, we expect inflation to stay above 3% this year, and that’s preventing the Bank of England from cutting rates more quickly. We expect rate cuts this month and again in November.
Japan: We have revised up our 2025 growth forecast on prospective fiscal stimulus and the stability afforded by the US-Japan trade deal. Coupled with growing confidence that inflation is nearing 2%, we think an October rate hike looks more likely.
FX markets: Softer US jobs data and our call for a September Fed rate cut/more easing this year means we now expect EUR/USD to end 2025 at 1.20. Rising euro market rates in the second half of 2026, as markets begin to price the first ECB rate hike in early 2027, point to EUR/USD at 1.22.
Market rates: In the US, a burning question is whether the 10yr yield can break down to 4% with inflation likely to get to the same level (tariff impacted). It could. But with considerable tension given the inflation / deficit negativities. The way to square the circle is for the curve to steepen. In contrast to the US, eurozone activity data is on a recovering trend, which of itself presents pressure for higher longer tenor euro rates.