Key views Global Monthly 26 February 2025

Macro

Eurozone

The eurozone recovery is continuing, helped by rate cuts and real income gains supporting consumption. However, recent tariff threats suggest the downside risks have grown. In the first half of 2025 frontloading effects are likely to boost quarterly growth. Afterwards, we see growth and inflation negatively impacted by the gradual rise in US import tariffs from 25Q3 onwards. In 2026 inflation will undershoot the target. Growth is expected to average 1.2% in 2025, slowing to 0.8% in 2026. Higher defence spending poses some upside risks, but tariffs are likely to overwhelm this impact.

The Netherlands

The Dutch economy grew by 0.4% q/q in Q4, after solid growth in Q2 and Q3. This marks 2024 as a strong year with an overall growth of 0.9% y/y. In 2025, growth is expected to recover further, before slowing on the back of US import tariffs. Growth will be domestically driven and will average, 1.8% in 2025, and 1.0% in 2026, compared to 0.9% 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, driven by still high wage growth.

UK

The government’s expansionary fiscal stance, alongside rising real incomes, is likely to keep the economy on a solid recovery path for now, though structural challenges remain. New US trade tariffs pose downside risks to growth in H2 25, but the UK is less vulnerable than the eurozone as it is less export dependent. 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 remain strong, while the labour market gradually cools. Upcoming stimulative policy notwithstanding, a weakening labour market, pockets of financial stress among households are likely to contribute to a slowdown in growth into 2025. Tariffs will be a further drag on growth in the course of this year, whilst also raising inflation. Our 2025 growth forecast stands at 2.1% on the back of still strong momentum, dropping to 1.6% in 2026. The tariff impact implies average PCE inflation of 2.4% in 2025, rising to 2.8% in 2026.

China

Following weak January PMIs, lending and LNY spending data provide some green shoots, while deflationary pressures seem to start fading. The outlook will continue to be shaped in the first place by real measures aimed at breaking the negative feedback loop from property. We expect more clarity on this front to follow at the annual NPC in early March. Developments in US-China relations are another important driver. We expect more US import tariffs to follow on top of the 10% implemented in February; the US administration is also considering broader measures affecting trade and investment.

Central Banks & Markets

ECB

We expect the ECB to cut rates again in March. We see the ECB pausing in April as uncertainty over tariffs as well as policy rates approaching the ECB’s assessment of neutral are reason to adopt a wait-and-see approach. A pause has also been signaled by some on the Governing Council. As tariffs hit growth and inflation, we see the ECB resuming its easing cycle at the June meeting, and cutting rates by more than markets currently price, until the deposit rate reaches 1% in early 2026. A year from now the ECB will therefore have moved from a restrictive to an accommodative policy stance.

Fed

After the December rate cut, the Fed’s upper bound on fed funds rate stands at 4.5%. With another upside surprise in January, inflation is unlikely to come down sufficiently to allow for any easing before it rises again following 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 indefinitely, lowering the risk of being forced to undo recent rate decisions. Neither inflation nor the labour market is expected to provide a cause for rate changes in the near term.

Bank of England

The MPC lowered Bank Rate to 4.75% in February, 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 and Bank Rate to settle at 3.5% in early 2026.

Bond yields

Trump’s statements continue to weigh on European rates. Over the past weeks, EU defence spending has become the new investors’ concerns in the EGB market. This development suggests that EU countries may need to increase government spending, likely financed through higher deficits and, consequently, increased borrowing requirements. As a result, higher bond issuance anticipation shifted the longer end of the curve higher, and this may continue if no joint EU debt debt issuance deal is found by the EU member states.

FX

In recent weeks the US dollar has given back gains and the euro as rebounded. This mainly because the market waits how developments will play out geopolitically but also on the economic front. We expect EUR/USD to move towards 0.98 again as we expect more ECB rate cuts than the market is currently pricing in and the Fed not to cut anymore in our forecast horizon. Our forecast for EUR/USD at the end of 2025 stands at 0.98.