Global Growth Dips Amid Uncertainty
You wouldn’t know if you judged solely by market performance, but the global economy has undergone three years’ worth of policy changes (at least!) in the three months since we penned the last edition of this quarterly. Oddly, given the numerous policy announcements (and pronouncements) since March, what we said then still stands: “we still grapple with considerable uncertainty around the “what”, the “when”, the “how”, and the “how long” of incoming US policy changes”.
But we do know a little more. The US administration has demonstrated both a willingness to severely rock the boat in order to induce desired outcomes, but also a sensitivity to market reaction that betrays no interest in having the boat actually tip over. On trade, the acute crisis moment has passed. The same is true for the US European/NATO relationship. The fear that the US would walk away from its traditional alliances has subsided, rightly so, in our view. Make no mistake: we will have higher tariffs, but not crazy high tariffs that would have little constructive but highly disruptive effects. And there will be plenty of barbs traded with allies and guaranteed moments of frustration, but the NATO Summit declaration that reaffirmed the “ironclad commitment to collective defense” is what matters more.
And so, while we reflect near-term downside risks in a lower US growth forecast for 2025, we remain optimistic about the medium term outlook. We see growth improving in 2026, both in the US and in Europe as more supportive policies take hold and the uncertainty cloud thins. We hold to our call for 75 bp worth of Fed cuts this year. The ECB has delivered the 100 bp worth of cuts we had projected, and we don’t think they need to do more. The BoJ is hand-tied and may sit pat for the rest of the year, and the BoE remains behind the curve and should hasten the rate cuts. China continues to focus on managing dual domestic and external risks.
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There's more to this quarterly edition in PDF. Take a look at our World Output and Inflation table – a short and sweet summary of our growth and inflation forecasts for the year and beyond.