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 third set of results of the shunto showed that 2025 will see slightly stronger wage hikes than 2024.
• 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 deepening growth concerns, we expect the BOK to deliver another 50bp (two 25bp) of rate cuts by end-2025.
• India: Negative output gap and on-target inflation should lead to 100bp 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: Growth has steadied, but risks now tilt to more easing, rather than less, given recent global developments.
• New Zealand: With inflation near target and global uncertainty elevated, we expect two more 25bp rate cuts, in May and July.

China

• We see strong headwinds after Q1, dragged by extorbitant US tariffs, payback from consumption stimulus, and the property fallout.
• We cut our 2024 GDP growth forecast from 4.5% to 4.0%, given the rapidly worsening US-China trade war.
• Beijing need to speed up and increase fiscal spending to bolster domestic consumption to offset drag casued by trade tensions.
• Clearing the property sector should still be Beijing’s top priority.
• Reforms to the social security system would be the most effective policies to boost consumption in the long run.

United States

• President Trump’s reciprocal tariff announcements were more severe than our expectations.
• Increased downside risks to growth and a front-loaded inflation shock should allow cuts to resume sooner than we had expected.
• We see a 25bp cut in December, followed by back-to-back cuts in Q1 2026.
• We expect Congress to extend expiring tax cut provisions, but substantial incremental fiscal stimulus is unlikely.
• The labor market is slowing, and risks remain skewed to the downside. Gradual cooling is more likely than a sharp deterioration.

Canada

• We now expect the BoC to deliver a 25bp cut in June 2025. A protracted trade war could lead to a deeper cutting cycle.
• Inflation has returned to the BoC’s target range. Elevated shelter inflation is likely to moderate gradually as the BoC eases policy.
• 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.
• After the tariff announcement, we now see 25bp cuts in both April and June, for a terminal depo rate of 2.00% (was 2.25%).
• 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 the second half of 2024. Surveys point to slow growth in coming quarters.
• Downside risks include higher yields, tariffs, weak confidence. Upside risks from low unemployment and strong wage growth.
• 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 expect fewer cuts.

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