RESEARCH — July 17, 2025
Global Economic Outlook: July 2025
By Ken Wattret
2025 economic predictions: How are we doing?
Having passed the midpoint of the year, several of our key economic predictions for 2025 are on track, including weaker US economic conditions. Multiple factors contributed to our expectation of a US slowdown this year, including the lingering effects of prior monetary tightening and dollar strength, diminished fiscal tailwinds, and higher tariffs. A recession has not been our base case, despite plenty of speculation that one would occur, partly because the accumulations of imbalances and excesses that have led to previous recessions are not evident. Although US real GDP contracted in the first quarter, this partly reflected an exceptional surge in imports due to tariff front-running. Our tracking estimate for the second quarter points to a rebound, implying very subdued quarter-over-quarter growth in real GDP on average during the first two quarters of 2025. Despite our view that a recession is not the most likely outcome, there are various risks to monitor, including an escalation of trade tensions. The sustained strong rebound in most major equity indexes since mid-April suggests a market assumption that proposed higher US tariffs will not ultimately materialize. That might prove overly optimistic, especially for section 232 tariffs.importance of energy supply from Gulf producers.
How are the BRICS performing?
Mainland China’s growth has been more resilient than we expected in the first half of 2025, although we still forecast a slowdown. Signs of weakness are becoming more apparent in Brazil and Russia. One of our key themes for emerging economies in 2025 was lower growth contributions from traditional engines like mainland China, Brazil and Russia. For mainland China, given declining tariff-related uncertainties, we raised our annual real GDP growth forecasts for 2025 and 2026 in our July update, albeit modestly, from 4.3% to 4.5% and from 3.9% to 4.0%, respectively. Nonetheless, we still project a slowdown in growth in the second half of 2025 due to higher tariffs, the unwinding of prior tariff front-running and diminishing policy stimulus. In Brazil, recent high-frequency data and sentiment indicators point to a marked weakening of economic activity, aligning with our forecast of a quarter-over-quarter contraction in real GDP in the second quarter. S&P Global’s Purchasing Managers’ IndexTM (PMI®) data for Brazilian manufacturing and services were in contraction territory in June. In Russia, May’s data showed broadening weakness, with the 0.7% year- over-year growth rate in the economic activity index well below its peak year-to-date (3.1% in January).
How is Europe's economy performing?
Europe’s largest economies have continued to struggle as predicted. The weakness in Germany has been particularly persistent, and its high export share in GDP makes it relatively sensitive to deteriorating global growth prospects. The large size of its automotive sector also leaves it particularly exposed to higher US tariffs. However, there is some welcome light at the end of the tunnel, with the large package of fiscal measures unveiled in early March (focused on infrastructure and defense spending) expected to boost growth from 2026 onward. In France, high-frequency indicators remain soft, with still-elevated policy uncertainty, euro strength and weak external demand expected to weigh on growth in 2025. Meanwhile, the UK’s fiscal problems will remain a hindrance to growth, with the government facing another round of budget tightening in the autumn. In contrast, southern Europe’s growth outperformance has been one of the positive surprises of 2025 to date, contributing to a more benign environment in sovereign debt markets than we had expected. In the region and more generally, however, we continue to fear that market concerns over persistent high budget deficits and elevated debt burdens will rise, increasing volatility and pushing up yields, which could further dampen already subdued growth
What is happening with inflation?
The predicted divergence of inflation dynamics is starting to become more apparent. Consumer price inflation rates have fallen markedly from their pandemic-driven peaks. However, we had predicted that some variations would emerge in 2025, contributing to more divergent monetary policies. US policy shifts, primarily related to tariffs and migration, have been expected to lead to a pickup in US inflation later this year. While this had not been apparent in US consumer price data up to May, June’s figures did show some effects, with outsized increases in various core categories.
Moreover, S&P Global’s PMI data have continued to show relatively elevated price indexes in the US, in contrast to most other major economies. In Western Europe, weak demand conditions suggest that underlying disinflationary trends will persist, reinforced by currency appreciation. In mainland China, the adverse effects of higher tariffs are exacerbating supply-demand imbalances and prolonging consumer price deflation. Our prediction of divergence in the composition of core inflation is also being realized, with moderation in services inflation rates contrasting with higher rates for core goods.
Central banks and the Fed
Divergence is already evident in central banks’ actions. As forecast, the US Federal Reserve’s easing cycle has been paused due to lingering concerns over the possible inflationary effects of policy shifts. We continue to forecast the next rate cut in December 2025 (somewhat later than futures markets currently imply), followed by a stream of cuts during 2026 (which futures markets have priced in). The European Central Bank has already halved the level of its policy rates relative to their post-pandemic peaks, breaking the normal pattern of following the direction of Fed policy with a lag. Based on its recent signals, it looks like the ECB’s easing cycle is almost done. One of our predictions for 2025 that went off course was the expectation of cautious monetary policies in Asia-Pacific. Many central banks in the region have been cutting interest rates recently, some rather aggressively, with the weakness of the US dollar as a contributing factor. We think the easing has further to go as, with inflation prospects improving, central banks can be more sensitive to downward pressures on growth. More generally, we expect looser monetary policy to offset trade- related growth headwinds, implying modestly stronger growth rates globally and across most major countries and regions during 2026.
Dollar depreciation?
Our long-standing call for effective US dollar depreciation has come to fruition, with the weakness more pronounced than expected over the first half of 2025. The Fed’s broad real effective dollar index has fallen by over 6% from its peak in January. The magnitude of this depreciation is particularly noteworthy, given that higher US tariffs were supposed to boost the US dollar, and interest rate differentials have moved in the US’ favor. The weakening of the dollar suggests a waning appetite for US assets, and we will continue to monitor fund flows accordingly, including foreign holdings of US Treasurys. The accompanying strength of major European currencies is compounding their economic difficulties and has confounded our expectations. From a level still about 15% above its long-run average, we expect the depreciating trend of the real broad effective dollar index to continue, but at a slower pace. Among the currencies of the US’ major trading partners, the yen’s outperformance remains our expectation, consistent with divergent monetary policies. The reverse applies to the Mexican peso.
This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.