At mid-year, the global economic outlook is weaker than at the start of the year – mainly due to renewed protectionism in the United States, which has jarred global trade and generated widespread policy uncertainty. But as long as the US manages to avoid a recession (25% risk), the global economy looks set for continued – albeit unspectacular – expansion, as past energy shocks fade and central banks further ease monetary policy. If no new risks materialise, increased public spending on infrastructure and defence can support global trade and production and further narrow the transatlantic growth gap, which had already started last year.
Narrowing growth gaps. US growth looks set to slow over the medium term, as trade tariffs impair supply potential and harm real activity, while momentum in Europe continues to improve gradually. We expect the UK somewhat to outperform a Eurozone held back by structural challenges in core economies. While China is likely to continue to slow on trend, growth should remain fast by Western standards, as Japan grows at slightly above its low potential.
Price pressures converge towards 2%. Global inflation moderated in 2024, after the 2022-23 surge. Over the medium term, we expect inflation to stay elevated in the US, at slightly above the 2% target, while price moderate towards target in the UK and Japan. Inflation is likely to remain close to target in the Eurozone and pick up modestly in China, as the recent bout of disinflation fades.
Central banks aiming for neutral. In the US, we look for two 25bp cuts from the Federal Reserve in 2H25 and two more in 2026, to lower the upper limit of the Federal Funds Rate corridor to 3.5% by end-2026. In the UK we expect the Bank of England to cut twice more in 2025, to take the Bank Rate to 3.75%. In the Eurozone, we project just one more cut from the European Central Bank to take the deposit rate to 1.75% by end-2025, followed by two 25bp increases in 2026.
Two-sided risks. While the diffusion of AI raises the hope of faster productivity growth in advanced economies, we need to watch the risk that Washington’s erratic trade policies tip the US into recession and impair global growth further. In addition, we need to monitor a host of tail risks linked to growing East-West geopolitical tensions and political disenchantment across the Western world.
This document reflects our latest economic projections, which can be found here
