Figure 1: Global forecast summary
Source: Aberdeen, March 2025
Fading US exceptionalism
US economic data have cooled sharply, due to a decline in sentiment amid elevated policy uncertainty. Indeed, ‘nowcasts’ for first quarter (Q1) growth point to a large contraction, while recession risk probability models are also picking up.
However, sentiment surveys have been an unreliable guide recently, and technical factors appear to be overstating the extent of the underlying slowdown. The labour market is cooling but this is not consistent with a downturn. So, although we expect a softer Q1, we are not forecasting a recession in our base case.
Nonetheless, US tariff uncertainty is very elevated, and we expect the average tariff rate to rise from about 3% at the start of President Donald Trump’s term to around 9%. This increase is larger than we had previously anticipated, and includes further tariff-increases on China, various sector-specific tariffs, and a partial reciprocal tariff regime.
Meanwhile, federal agencies are facing significant disruption under the reforms driven by the Department for Government Efficiency. Federal job losses are starting to show in the employment data, with the full extent of job reductions likely to be in the range of 200,000-500,000, and an average drag on monthly payrolls of around 10,000-15,000 over the next year.
Waiting on ‘pro business’ Trump
Progress on the ‘market friendly’ aspects of Trump’s policy mix, such as tax cuts and deregulation, has been more limited. We still expect modest fiscal stimulus, worth around 0.5% of gross domestic product (GDP). Meanwhile, the energy and financial sectors are still likely to benefit from deregulation. However, the administration’s seemingly relaxed attitude to recent equity market weakness suggests that the risk of lower growth and higher inflation has increased.
We’ve lowered our US GDP forecasts to 1.8% (down 0.2 percentage points) and 1.8% (-0.4pp) in 2025 and 2026 respectively, while pushing up our consumer price index (CPI) inflation forecasts to 2.9% (+0.5pp) this year. This follows our previous lowering of the probability on our ‘Trump delivers for markets’ scenario and increase to the probability on our damaging ‘Trump unleashed’ scenario. We’ve also added a US recession driven by a confidence collapse to our scenarios.
All this makes for a difficult environment for the Federal Reserve (Fed), especially as there is an active debate about the growth versus inflation effects of tariff increases. We think the Fed will remain focused on the inflationary impact of higher tariffs and expect just one rate cut this year. However, the risks are skewed towards more easing.
China – easing continues but more needed
In China, financial conditions are now the most accommodative they have been since the global financial crisis, and fiscal easing worth between 1.5% and 2.0% of GDP was announced at the recent ‘Two Sessions’ meetings of political leaders. But, while policy rhetoric and action have been more positive, there was very little announced to tackle consumption weakness or the headwinds from the property sector.
We think this easing is enough to deliver growth of around 4.6%, which policymakers can plausibly claim is within the vicinity of the ‘around 5%’ target . However, the nominal growth environment is likely to remain very weak. We have revised down our forecasts for 2025 CPI to 0.2%, and there is a risk of modest deflation, especially if policymakers do not allow the renminbi to depreciate.
Risks are modestly skewed to the downside, and we continue to see the possibility of a ‘China balance sheet recession’ scenario if policymakers fail to tackle the headwinds facing the economy. On the other hand, a more aggressive policy stance, where ‘China turns on the policy taps’, is also possible.
Europe’s spending surge
Elsewhere, the Eurozone is on the verge of a big shift in fiscal policy with a reformed constitution unlocking higher defence spending and public investment.
Bond yields rose sharply on this news, but the combination of higher yields, elevated equity prices, and a stronger euro suggests the market is pricing a growth shock rather than concerns about fiscal sustainability.
We think these measures will boost GDP growth by 0.5%-1.0% over the next few years. And there is a scenario where the combination of higher investment spending and structural reforms delivers an even greater boost to European growth.
A ceasefire deal over Ukraine could prompt a limited resumption of Russian gas flows, also supporting European growth. However, there may be political resistance to the wholesale resumption of these flows.
With the near-term European growth outlook very weak there is still scope for further European Central Bank easing, and we expect interest rates to fall to 2% this year.
Mixed picture elsewhere
In the UK, fiscal policy is set to tighten further, with the Chancellor of the Exchequer likely to announce spending cuts at the end of March. The Bank of England is likely to continue with its quarterly rate-cutting rhythm. Policymakers will wait to see how the economy responds to the large ‘cost shock’ this spring before considering speeding up the pace of easing.
Meanwhile, the Bank of Japan is likely to tighten policy further, as wage pressures mount and interest rates are returned to a more neutral stance. We are expecting one further hike this year in October, but earlier tightening is possible.
Across emerging markets, the rate-cutting cycle will continue cautiously. Mexico, India and many Southeast Asian economies could be relative beneficiaries from redirected global trade flows, if US tariff increases primarily focus on China. However, if broader increases in US tariffs persist, many of these economies will encounter significant challenges.