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.
• The Ishiba cabinet is expanding fiscal policy in cooperation with some opposition parties such as JIP.
• The second set of results of the shunto showed that 2025 will see slightly stronger wage hikes than 2024.
• We expect the BOJ to hike in July 2025, assuming the economy and prices remain on track with the bank’s outlook.

Asia

• We expect a soft growth patch in 2025, due to Trumponomics, weak China demand and slowing semiconductor sales.
• Countries with stronger domestic demand (Malaysia, Taiwan) should outperform, while India, Thailand and Korea could disappoint.
• Disinflation should sustain, exacerbated by the disinflationary impulse from a redirection of Chinese exports to the region.
• A divergence of monetary policies is likely, with both aggressive easing (BOT, RBI, BSP, BOK) and rate hikes (BNM and CBC).
• Korea: Amid deepening growth concerns, we expect the BOK to deliver another 50bp (two 25bp) of rate cuts by end-2025.
• India: We expect growth to disappoint, inflation to converge to the 4% target, and see 75bp of rate cuts in the pipeline.
• Indonesia: Populist measures of the new government raise fiscal risks while current account deficits continue to widen.
• Australia: Growth has steadied, and recent inflation clues make our May rate cut forecast a line ball call.
• New Zealand: The outlook is brightening, but with fiscal policy tight and inflation under control, we expect two more 25bp rate cuts.

China

• The surprising breakthrough of Deepseek has sparked a stock market rally, potentially boosting investment and consumption.
• Beijing ramped up fiscal stimulus with an augmented fiscal deficit of around 10.0% of GDP in 2025.
• Despite some initial stabilization of the property sector in large cities, the downturn has not yet bottomed out.
• We see headwinds after Q1, dragged by exports, fading consumption demand, geopolitical tensions, and the property meltdown.
• We expect GDP growth to drop to 4.5% in 2025 from 5.0% in 2024, below the government’s target of 5.0%.

United States

• The FOMC is unlikely to deliver rate cuts in 2025, as inflation remains elevated. We expect QT will continue until March 2026.
• Monetary policy easing is likely to resume in Q2 2026 after a tariff-induced inflation resurgence has passed.
• We expect Congress to extend expiring tax cut provisions, but substantial new tax cuts are unlikely.
• The labor market is slowing, and risks remain skewed to the downside. Gradual cooling is more likely than a sharp deterioration.
• There is a risk of Trump's tariff policy being more moderate, while the Fed might look through tariff-driven inflation.

Canada

• We expect the BoC to deliver a 25bp cut in April 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 likley to remain elevated, while downside risks to growth due to tariffs have increased.

Euro Area

• We have upped our forecasts for growth based on expectations of substantial fiscal easing from Germany and Europe as a whole.
• We see core inflation above target in 2025 (and ultimately higher due to fiscal easing), but services inflation momentum slowing.
• We expect a final 25bp rate cut in June. We have taken out two cuts and raised our terminal rate call to 2.25% (from 1.75%).
• 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.
• Upside risks: low unemployment, budget measures. Downside risks: rising yields, expected Trump tariffs and weak confidence.
• Headline inflation is rising again, partly due to base effects and energy, but momentum in service prices has clearly slowed.
• After commencing the easing cycle in August 2024, we expect quarterly cuts until early 2026. Markets expect fewer cuts.

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