The global macro economy entered the second quarter of 2025 clouded in uncertainty. With major economies pursuing sharply diverging policy paths and geopolitical tensions on the rise, financial markets are navigating an increasingly volatile environment. Yet, despite the disruptive headlines, most economies are forecast to avoid recession. Instead, a soft landing remains the base case as robust labour markets, targeted fiscal policies, and cautious central banks anchor economic resilience.

Global Overview: Slower Growth, Persistent Uncertainty

The dominant theme of the 2025 macro landscape is policy unpredictability, particularly in the United States. Contrary to expectations of tax cuts and deregulation following Trump’s re-election, the administration has implemented fiscal austerity and aggressive trade tariffs, both of which have dampened growth expectations.

While US financial markets reversed their initial post-election rally, European and Chinese markets outperformed, thanks to growth-friendly fiscal stimulus. Global GDP is projected to grow by 2.4% in both 2025 and 2026, with inflation gradually declining from 3.2% to 2.9% over the same period.

Central banks globally are shifting toward neutral interest rate policies, easing cautiously but stopping short of outright stimulus. Monetary policy divergence will persist, but the coordinated response to global trade tensions has reduced the risk of systemic recession.

United States: From Exceptionalism to Fragility

The US economy is decelerating. Growth is expected at 1.4% in 2025, impacted by government spending cuts, layoffs, and a barrage of trade tariffs. Consumer sentiment has weakened, and inflation is projected at 3.3%, driven by higher import costs.

The Federal Reserve faces a dilemma: growth is slowing, yet tariffs are inflating prices. While the Fed is expected to cut rates later in 2025, the pace will be gradual and modest, reflecting its preference to observe how policy crosscurrents evolve.

Nonetheless, the labour market remains strong, and household incomes are stable, reducing the probability of a recession. But risks remain skewed to the downside, especially if inflation expectations begin to unanchor or consumer confidence translates into weaker spending.

China: Fiscal Support and the Threat of Deflation

China is on track to meet its official 5% growth target, with forecast GDP at 4.8%. However, beneath the surface, domestic demand remains fragile, and inflation is dangerously low at just 0.5%.

To avoid a deflationary spiral, Chinese authorities are expected to ramp up fiscal spending, particularly on infrastructure. With export growth hampered by tariffs, the government may also resort to currency depreciation as a countermeasure—boosting the yuan price of imports and partially neutralising the trade shock.

The real challenge for China lies not in headline GDP, but in nominal growth, which remains weak and reflects poor underlying momentum.

Euro Area: Fiscal Reforms Bolster Outlook

The eurozone economy is forecast to grow just 0.5% in 2025, but the medium-term outlook has brightened due to a major fiscal stimulus package from Germany. A €500 billion infrastructure plan and rising defence spending across the EU are expected to support regional growth in 2026 and beyond.

Inflation is projected to stabilise at 2%, allowing the European Central Bank (ECB) to continue cutting rates gradually, although the pace may slow as policy approaches neutral. The ECB is unlikely to cut below 2% unless external shocks materialise.

Risks remain, especially if trade tensions escalate or fiscal plans fail to deliver. However, the euro area now stands on firmer macroeconomic footing than earlier in the cycle, helped by both private demand stabilisation and fiscal tailwinds.

United Kingdom: Weak Growth and Sticky Inflation

UK GDP growth is forecast at a subdued 0.4%, as fiscal tightening, higher labour costs, and sluggish consumption weigh on activity. Inflation is projected to remain elevated at 2.5%, above the Bank of England’s target, driven by energy prices and cost-push pressures.

The labour market is holding steady for now, but hiring plans are weakening. The Bank of England is expected to cut rates cautiously and in a stepwise fashion, with inflation persistence preventing a faster pace of easing.

Japan: Gradual Normalisation and Geopolitical Transition

Japan’s economy is growing at 1.3%, with inflation running at 2.6%. The Bank of Japan (BoJ) has begun to normalise policy, raising interest rates for the first time in years. Despite market volatility around the decision, further gradual hikes are expected.

However, Japanese rates will likely remain below global norms, limiting any drastic shifts in capital flows. The key wildcard is political leadership, as a pending transition could impact economic direction in the medium term.

Emerging Markets: Caught Between Tariffs and Currency Pressure

Emerging markets face a stagflationary threat due to US trade policy. EM ex-China/Russia is forecast to grow at 3.5%, with inflation peaking at 7%. Rate cuts have begun in countries like Mexico, which has already slashed interest rates by 200bps, with further easing expected.

In CEE (Central and Eastern Europe), Germany’s stimulus and potential ceasefire in Ukraine provide growth upside, especially for Poland, Czechia, and Hungary. But the risk of broad US–EU tariffs remains a headwind.

South Africa, Panama, and Mexico are grappling with direct geopolitical tensions with the US, raising financial risk premiums and creating uncertainty around trade relationships.

Key Global Forecasts for 2025

Conclusion: Macro Stability Amid Market Volatility

While financial markets remain sensitive to the shifting policy landscape, the underlying fundamentals of the global economy remain resilient. The outlook for Q2 2025 is one of moderate slowdown, not recession. Growth is slowing, but labour markets are firm, inflation expectations are mostly contained, and central banks are easing cautiously.

The policy divergence between the US and the rest of the world has diminished the case for US exceptionalism. As a result, global markets are entering a phase where data matters more than narrative. Volatility will persist, but investors who remain focused on long-term fundamentals rather than daily headlines will be better positioned to navigate this environment.

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