Key views Global Monthly April 25
US tariffs surprised even our pessimistic expectations, and despite the 90 day reprieve for the biggest rises, significant tariffs remain in place. The US has focused chiefly on China, as we had long expected, but the eurozone (and the rest of the world) are still hard hit – by both tariffs and the policy uncertainty. Interest rate cuts and other forms of policy support are a cushioning factor in the eurozone and China, while in the eurozone specifically, defence spending, and in Germany new infrastructure spending will support growth in 2026. Global trade and growth are also initially benefiting from a frontloading of US imports ahead of tariff rises. Still, the nascent recoveries in domestic demand in the eurozone and China face downside risks from weaker confidence, while in the US, demand will be hit by the tariff shock to real incomes. Inflation in the US is expected to reaccelerate, but to fall below target in the eurozone. This is likely to drive a divergence in Fed & ECB policy, with Fed policy staying on hold until late 2026, and the ECB continuing to cut rates.
Macro
Eurozone
The US tariff shock is likely to push the eurozone to the edge of recession over the coming quarters, though our base case sees domestic demand (helped by rate cuts) keeping the economy growing just above zero this year. Next year, higher defence spending and German infrastructure spending are likely to drive much higher growth. Disinflation is also continuing, with services inflation less of a worry, and wage growth continuing to cool. Tariffs are likely to drive an undershoot of the 2% inflation target by the end of this year, helped by a stronger euro and falls in energy prices.
The Netherlands
After recovering in 2024, growth is expected to recover further into 2025, before slowing on the back of US import tariffs. The Q1 figure is expected to come in at 0.5% q/q. Given external uncertainty, growth will be domestically driven and will average 1.4% in 2025, and 1.3% in 2026, compared to 1.0% in 2024. Unemployment will increase slightly, but the tight labour market remains a constraining factor. Inflation is expected to stay above the 2% target in the coming years, mostly driven by still-high wage growth, rent increases, and product-specific tax changes.
UK
Government spending and rising real incomes are likely to keep the economy on a recovery path for now, but structural challenges remain. The UK is less vulnerable to US tariffs than the eurozone as it is less export dependent, and it faces a lower reciprocal tariff of 10% vs the threatened EU tariff of 20%. Services inflation is stubbornly high, with wage growth still well above levels consistent with 2% inflation. A sustained return to 2% inflation will take longer than elsewhere, due to historically higher inflation expectations in the UK.
US
Growth and consumption are likely to slow on the back of a strong decline in confidence, caused by significant policy uncertainty. A gradually cooling labour market and pockets of financial stress among households are likely to contribute to a slowdown in growth in 2025. Tariffs will be a further drag on growth in the course of this year, whilst also raising inflation. On the basis of the recent developments in the trade war, our 2025 and 2026 growth forecasts are downgraded to 1.4% and 0.6% respectively. The tariff impact implies average PCE inflation of 3.1% in 2025, rising to 3.6% in 2026.
China
GDP growth in Q1 was stable at 5.4% y/y and March data surprised to the upside, but property data remained lacklustre and ongoing disinflation shows the supply side is still stronger than the demand side. The escalating US-China tariff war leads to a large export shock, although exemptions (e.g. on consumer electronics), trade circumvention/reorientation, more policy support and looser FX policy will cushion the blow. Although we already expected high China tariffs, we adjusted our quarterly growth profile and cut our 2025/26 growth forecasts to 4.1% (from 4.3) and 3.9% (from 4.2%).
Central Banks & Markets
ECB
The Governing Council cut rates again in April, in a unanimous decision. The tone in the press conference was dovish, reflecting the tariff hit to the growth outlook. More importantly, the April cut revealed a more dovish reaction function to tariffs; before, some Governing Council members still favoured a pause. Given the growth and inflation outlook we expect a further 75bp in rate cuts, taking the deposit rate to 1.5% by September. With looser fiscal policy expected to lift growth from late this year onwards, the Governing Council is likely to keep policy on hold in 2026.
Fed
After the December rate cut, the Fed’s upper bound on fed funds rate stands at 4.5%. With relatively hot inflation readings in the start of the year, inflation is unlikely to come down sufficiently to ease , especially considering a new impulse from tariff policy. Risks to inflation and the labour market are currently roughly in balance, but likely to tilt to inflation in the second half of the year. Therefore, the Fed keeps rates at the current restrictive level, hedging against politically sensitive policy mistakes. The macro constellation may allow the Fed to slowly start easing in the second half of 2026.
Bank of England
The MPC kept Bank Rate on hold at 4.5% in March, in line with our expectations. Incoming data suggests stubbornly high underlying inflationary pressure, and sticky wage growth. The government’s expansionary fiscal stance, alongside continued elevated wage growth, poses upside risks to medium-term inflation. This is likely to keep rate cuts at a more gradual pace than for the ECB. We expect three more 25bp rate cuts in 2025 with the next cut expected in May. Bank Rate is expected to settle at 3.5% in early 2026.
Bond yields
Over the past weeks, US Treasuries underperformed EU government bonds. US term premium has risen sharply leading to higher Treasury yields. This is primarily driven by a growing lack of confidence among investors regarding the US economy and government policy. Conversely, European government bonds have benefitted from this shift, as well as from a risk-off sentiment. Given the frequent policy U-turn by the US government and the volatility these changes trigger, we maintain a bullish stance on EU rates and recommend caution regarding US bonds at this time.
FX
The dollar is out of favour. Investors sell the dollar across the board because of the unfavourable US growth-inflation mix, US policy uncertainty, negative trend and recently because of Trump's attack of Fed Chair Powell. There have been questions about the dollar's safe haven status. The real test on its safe haven status has not happened yet as VIX and liquidity spreads have not yet reached the level of previous crises. With no viable alternative to the dollar, we think it will survive the test. Our forecast for the end of 2025 stands at 1.08.
