Economic and financial risk insights: Summer lull takes hold as global growth momentum slows

• Growth: US economic growth indicators softened more acutely in late 2Q25 alongside sluggish momentum in Europe. There are signs of positive growth momentum in China.
• Inflation: The US inflation divergence with Europe and China will widen 3Q25 as a result of tariff impacts.
• Interest rates: Global interest rates will likely remain in holding pattern until policy uncertainty abates.

US economy on shaky footing. In the US, June payrolls rose 147 000 while the unemployment rate fell to 4.1%, though almost half of the jobs growth stemmed from the government sector (see Figure 1). Trade-driven uncertainty remains elevated with new tariff rates still being announced over the coming weeks.  Meanwhile, consumer spending has shown more acute signs of moderation in recent months (see Figure 2). 

Figure 1: US government share of nonfarm payroll employment (%) 

Figure 2: US consumer spending growth  

In the euro area, industrial production fell 2.4% in April as the lift from tariff front-loading reversed. PMIs are treading water near 50, and consumer confidence slipped further to -15.3 in June. Germany’s EUR 500 billion infrastructure fund skews short-term growth risks to the upside. China serves as the relative bright spot: retail sales rose 6.4% year-on-year in May, and export gains to ASEAN offset trade flow softness to the US.

Divergence set to accelerate this quarter. Price dynamics are diverging but remain little changed from a month ago. Headline CPI in the US ticked up to 2.4% in May, with core holding at 2.8%. Tariff effects have yet to materialise but are expected to build later in 3Q25 as inventories run down. A stronger euro (see Figure 3) and weak goods demand supported euro area core inflation, steady at 2.3% in June.

Figure 3: Euro movements vs USD

In China, consumer prices slipped 0.1% year-on-year in May for a fourth month of near-deflation (see Figure 4), underscoring subdued domestic demand even as consumption volumes grow. With crude prices retreating after de-escalation of tensions in the Middle East, headline energy components should soften further across regions, offsetting modest food and services price pressures.

Figure 4: China inflation measures  

Ongoing uncertainty regarding future policy path. The US Federal Reserve (Fed) left the funds range at 4.25-4.50% in June, reiterating patience and data-dependence while projecting two quarter-point cuts by December (see Figure 5). That was in line with our forecast and market pricing. The European Central Bank, meanwhile, trimmed the deposit rate to 2.0% in June. Another cut later this year is plausible as trade-related growth concerns linger. In the UK, a loosening labour market also raises the odds of a further rate cut in August.

Figure 5: US and euro area policy rate outlook

US and German 10-year yields have remained range-bound around at 4.3% and 2.6%, respectively (see Figure 6). Further upside is likely on a deteriorating US fiscal outlook and heavier expected issuance linked to the infrastructure fund in Germany. China’s central bank cut key policy rates by 10 basis points (bps) and the reserve-requirement ratio by 50 bps in mid-May. The 10-year CGB yields remain near record lows at 1.6%.

Figure 6: US and Germany 10-year yields  

US policy rates will remain restrictive relative to Europe. US policy uncertainty continues to weigh on spending and investment. Any relapse in trade talks or failure to implement the NATO defense pledge could renew volatility across global bond markets.

Table 1: Key forecasts and scenarios (in %)