Recent trends reveal a delicate balancing act for the global economy. While the US is holding up well, the euro area is experiencing sluggish growth and the UK is facing tighter government spending. 

Trade tariffs, government spending and decisions by central banks are all playing a big role in shaping what happens next.

Here’s how the latest developments are affecting the US, Europe, the UK, Japan and China:

United States

The US economy stayed strong in the first half of 2025 despite a lot of uncertainty in economic policies. The job market has slowed down a bit this year but remains balanced. Over the past three months and the last year, the US has added about 150,000 jobs a month, highlighting an uncommon period of stability.

Inflation (the rate of increase in prices for goods and services) has been lower than expected. The sharp rise in announced tariff rates saw many companies bring forward imports to avoid higher costs. This has helped keep prices down and it’s likely this will continue throughout 2025. However, the latest inflation data showed that prices for everyday items are starting to go up faster, suggesting companies are beginning to pass tariff costs on to consumers.

We think core inflation, which excludes volatile food and energy costs, will end the year at 3%.

Euro area

We expect the euro area to grow by about 1% in both 2025 and 2026, which is a bit below trend. The global economy is slowing down, partly because of policy uncertainty and higher tariffs, which is expected to weigh on demand for goods and services. The boost from Germany’s new spending package and increased defence spending across the EU is likely to come in 2026.

The chance of inflation being below the European Central Bank’s 2% target is getting higher. Wages and service prices are falling, and with the global economy slowing down, a stronger euro and lower energy prices, inflation is likely to drop even more.

We predict one more interest rate cut this year, which would bring rates to 1.75%. The risks are leaning towards more cuts if needed.

United Kingdom

The UK’s fiscal headroom (the amount of money the government can use to increase spending or cut taxes) is about £10 billion and is likely to run out before the Autumn Budget. This is partly driven by the Office for Budget Responsibility’s expected lower growth forecasts. We predict UK economic growth of only 0.8% in 2026.

The job market and wages are cooling down, and we expect services inflation, which has been around 5% recently, to follow. These developments, along with the prospect of tighter fiscal policies in the Autumn Budget and stable long-term inflation expectations, should convince the Bank of England (BoE) that inflationary pressures will subside. 

We expect the BoE to continue lowering interest rates every quarter. This would put interest rates at 3.75% at the end of 2025 and 3.25% by mid-2026.

Japan

Tariffs have made consumers and businesses in Japan feel less confident, which suggests they might spend less and invest less in the coming months. Despite this, Japanese exports were fairly strong in April and May. The drop in car exports to the US was balanced by exports to Asia and tech exports being made earlier.

We don’t expect the Bank of Japan (BoJ) to change its current interest rate target of 0.5% at its July meeting. 

China

China’s economy grew by 5.2% in the second quarter compared with the same period last year, which was more than expected. Because of this, we’ve raised our full-year growth forecast for China from 4.6% to 4.8%. The growth was mainly due to strong exports and policies to support the economy.

However, we expect China’s growth to slow down in the second half of the year. The positive effects from early exports will fade and other challenges will continue to affect demand.
 

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