In the early months of the year, we witnessed market and economic upheaval, especially in the US. 

Stock markets experienced heightened volatility in early April following the US tariff announcement. The S&P 500 Index, which tracks the 500 largest US companies, fell sharply. The so-called Magnificent 7 – Apple, Microsoft, Nvidia, Amazon, Meta (Facebook), Alphabet (Google) and Tesla – led the decline. 

However, sentiment began to shift from 9 April when the US announced it would pause the bulk of its tariffs for 90 days. This news sparked a robust market recovery. Over the following month, the recovery was further strengthened by IT and communication services companies reporting earnings growth that exceeded market expectations, and a deal between the US and China to reduce tariffs. 

Overall, these tariff reprieves and trade deals have brightened the economic horizon. 

United States

Positive trade developments with China have lowered our forecast of the US’s effective tariff rate¹ on its trading partners. By year-end, we expect this rate to be just above 10%. Although higher than last year, it is significantly lower than our forecast of around 20% immediately following the broad US tariff announcement on 2 April.

We now expect US economic growth of around 1.5% this year, double our previous estimate. 

We expect the pace of inflation (the rate of increase in prices for goods and services) to increase, though not to the levels we had predicted prior to the tariff truce. We expect core inflation, which excludes volatile food and energy prices, to end the year at 3%. 

We continue to expect two quarter-point interest rate cuts in the second half of the year.

Euro area

Global trade developments have been positive for the euro area’s growth outlook. The US-China tariff truce boosts global growth prospects, and initial US agreements with the UK and China raise hopes for similar US-euro area progress. As a result, we have increased our euro area growth outlook for 2025 to just above 1%. 

We continue to expect interest rates to end the year at 1.75%, down from the current 2.25%. 

United Kingdom

An improved global outlook and greater-than-expected growth in the first quarter have led us to raise our forecast for full-year UK economic growth to just above 1%, up from our previous forecast of around 0.5%. However, we expect growth to soften in the second quarter due to continued trade uncertainty. 

Core inflation remains elevated, but the longer-term outlook is likely to give the Bank of England (BoE) conviction that inflationary pressures will ease.

We continue to expect the BoE to cut interest rates to 3.75% by year-end.

Japan

Tariff challenges are likely to have a significant impact on Japanese exporters, leading to a more cautious approach by the Bank of Japan (BoJ) as it considers rate hikes. 

Prices continue to rise, and we expect core inflation to stay above the BoJ’s 2% target throughout 2025.

We expect the BoJ will pause any rate hikes until the tariff situation stabilises. 

China

Positive US-China trade developments make us more optimistic about China’s growth prospects. We have increased our forecast for China’s 2025 economic growth to 4.6%. However, there are significant risks that mean growth could be lower than this.

We expect interest rates to end 2025 at 1.3%, slightly higher than our previous forecast of 1.2%. We have lowered our forecast for year-end headline inflation to just above 0% as progress in trade talks eases pressure on the price of imported food. Our outlook for core inflation remains unchanged at 0.5%.

¹ The effective tariff rate measures the total taxes levied on imports.

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