Economic and financial risk insights: Global growth is cooling as tariff impacts heat up

• Growth: global growth is cooling gradually with US growth projected to fall below trend in 2H25.
• Inflation: tariffs have started to raise US inflation, but the EU is on track to meet the ECB's 2% target while China continues to navigate weak prices.
• Interest rates: US hard data reaffirms our view for two Federal Reserve interest rate cuts by year end; lower EU inflation sees the ECB easing again. 

Growth: the US slowdown starts to show in hard data. Hard data from the US is weakening early in 3Q25 with July nonfarm payrolls adding only 73 000 jobs. A total 258 000 in downward revisions slowed the 3-month moving average of job growth to just 35 000 (see Figure 1), and we expect further employment weakness as labour demand moderates. Still, 2Q25 US real GDP growth surprised to the upside at 3.0%, distorted by trade effects (see Figure 2), prompting us to raise our full-year forecast by 20bps to 1.7% despite below-trend growth expected in 3Q25 and 4Q25.

Figure 1: US nonfarm payrolls 

Figure 2: US GDP contributions (%)

We raise our euro area 2025 real GDP forecast by 40bps to 1.2%, again due to strong growth data linked to export frontloading early this year. US-EU and -UK trade deals alleviate some uncertainty, but sectoral tariffs (ie, pharma) are still a risk. Global business surveys remain weak (see Figure 3). We also lift China's forecast 2025 growth by 10bps to 4.8%, but its manufacturing PMI declined further to 49.3 in June, pointing to slowing 2H25 GDP growth. Across Asia, the end of tariff frontloading adds downside risks to growth.

Figure 3: Manufacturing PMIs

Inflation: Hints of tariff impacts in the US; disinflation elsewhere. We now see 2.8% annual average CPI inflation in the US in 2025 and 2026, as strong services disinflation in 1H25 gives way to tariff effects and higher goods prices in 1H26. In June, headline US CPI picked up to 2.7% yoy while core inflation rose to 2.9%. In early signs of tariff pass-through, higher appliance and furnishing prices pushed core goods inflation further positive at 0.6% (Figure 4). The euro area's July flash Harmonised Index of Consumer Prices (HICP) held at the European Cental Bank's (ECB) 2% target, with persistent services costs offset by a stronger euro and cheaper goods re-routing from Asia.

Figure 4: US core CPI inflation

China’s CPI finally edged back into positive territory at 0.1% in June, but producer prices remain deeply negative (Figure 5), underscoring weak domestic demand.

Figure 5: China inflation measures

Rate cut pressure is building. The US Federal Open Market Committee (FOMC) left the Fed funds rate at 4.25-4.50% in July, but not without two dissents signaling a growing divergence within the Fed over the current stance of policy. We continue to expect two cuts later this year as hard data softens further, keeping downward pressure on the 10-year Treasury yield at 4.2% by year end. The ECB paused in June after 100bps cumulative cuts since January, and we continue to expect one further rate cut before year end, while Bund yields hover near 2.7% (see Figure 6). In Beijing, the People's Bank of China (PBoC) maintained its seven-day reverse-repo rate at 1.4% in July and more cuts remain possible. The 10-year CGB yield hovers near 1.7%.  

Figure 6: SRI policy rate outlook

Global growth is cooling gradually. US inflation accelerates in 2H25 and 1H26, while disinflation dominates elsewhere. Upward growth revisions are backward looking.

Table 1: Key forecasts and scenarios (in %)