2025 Global Macroeconomic Outlook
Second Quarter
Global Fixed Income team’s view as of March 5, 2025.
Global Economy: Tariffs Add to Growth Uncertainties
U.S. Economy Faces Policy Uncertainty
We expect the U.S. economy to moderate, but tariff policy and potential government spending cuts may create short-term headwinds and disruption. Government spending has been a key driver of economic growth over the last few years. Furthermore, alongside health care, government employment was a major component of job gains over the same period. So, if the Department of Government Efficiency curtails expenditures and government headcount, growth could slow, and the labor market could weaken, at least over the near term.
Additionally, tariffs could weigh on consumer spending, while still-high interest rates may pressure the manufacturing and housing sectors. Eventually, President Donald Trump’s policies on deregulation, onshoring and taxes may take hold, boosting optimism and creating more positive economic momentum in the second half of 2025.
Eurozone Fiscal Expansion a New Catalyst Amid Potential Trade War
We expect muted growth to persist in the eurozone, where ongoing weakness in Germany and France has weighed on the region’s economy. However, plans for fiscal policy reform, which would enable higher defense spending, and the creation of a special infrastructure fund could aid Germany’s struggling economy.
More broadly, trade policy uncertainty with the U.S. represents a significant challenge for the export-heavy eurozone. Balancing these factors will challenge European policymakers, leaving their economies subject to heightened volatility in the coming months. The U.K. is in a similar situation as the eurozone but without much fiscal space after already agreeing to a contentious fiscal expansion in 2025. The U.K. is less reliant on trade than the eurozone, but trade policy uncertainty with the U.S. may weaken business confidence, slow trade and perpetuate tight financial conditions. Meanwhile, the manufacturing sector has struggled amid steadily declining output.
Trade Policy Pressures China’s 2025 Economic Outlook
A surge in fourth-quarter growth and ongoing government support measures helped China’s economy reach its 5% growth target for 2024. But new and threatened U.S. tariffs on Chinese goods cloud 2025’s economic outlook. Against this backdrop, we expect the politburo to continue its measures to boost domestic demand, employment and the struggling real estate sector. Other emerging markets (EM) economies will likely face a similar situation as U.S. trade and reciprocal tariff policies take shape.
Inflation: Prices Creep Higher
U.S. Inflation Battle Persists
Consumers continue to face elevated prices for a range of goods and services. After slowing to an annual rate of 2.4% in September, headline inflation steadily increased to 3% by January, while core inflation reached 3.3%. The services component, namely housing and rent costs, remains a key driver, though the pace has moderated. A large increase in multifamily housing units has slowly led to lower rent resets. However, the nationwide shortage of homes continues and is helping to fuel home price appreciation.
We still believe core inflation will slowly moderate toward the Federal Reserve (Fed) target, but potential tariffs, broad deglobalization and deportations could reignite goods inflation late in the year.
Tariffs May Keep European Inflation Above Target
European inflation has also been on a slow and steady climb, rising from an annualized pace of 1.7% in September to 2.5% in January. Relief may be elusive, as escalating trade tensions with the U.S. could keep the near-term inflation rate higher than the central bank’s 2% target. However, we believe core inflation may eventually trend lower amid moderating wage gains and easing services prices.
Additionally, corporate profits have been absorbing some inflation effects. Inflation in the U.K. remains well above its central bank target, with the annual core inflation rate recently climbing to 3.7%. A late-2024 surge in wage growth combined with upcoming tax hikes and a nearly 7% increase in the U.K.’s minimum wage keeps inflationary pressures firm.
Inflation Ticks Higher in China
Unlike the consumer prices backdrop in developed markets, China continues to face below-target inflation despite the government’s measures to spark growth. Consumer prices climbed to a five-month high in early 2025 as annual inflation reached 0.5%. This jump reflected the effects of government stimulus efforts, supportive central bank policy and seasonal effects from the Lunar New Year. We expect deflationary pressures to persist unless the government can restore domestic demand and maintain solid growth as tariffs take hold.
Monetary Policy: Central Banks Gradually Ease
Fed Stays in Wait-and-See Mode
After cutting interest rates by 1 percentage point in 2024, the Fed shifted to pause mode in early 2025. We expect policymakers to resume rate cuts as early as June after assessing the effects of Trump administration policies on inflation and the labor market. Entering 2025, economic data were solid, and inflation remained above the Fed’s target, motivating the Fed to proceed cautiously. We still think at least two more rate cuts are likely later in the year. However, if trade policy and government spending disruptions trigger a sharp slowdown in growth, proving the pause was a mistake, the Fed may ease more aggressively.
Fiscal Expansion, Trade and Inflation Complicate Monetary Policy in Europe, the U.K.
Despite weak growth in the eurozone and the U.K., inflation remains above central bank targets. Nevertheless, the European Central Bank (ECB) appears likely to continue its rate-cut campaign through mid-year, when it will likely pause to gauge the effects of the easing. Furthermore, the ECB will want to judge the potentially offsetting effects of tariffs and renewed fiscal expansion, particularly in Germany.
In the U.K., the Bank of England (BoE) seeks to encourage growth and remain in easing mode. Similar to other global central banks, the BoE may continue to proceed cautiously to judge the impact of recent fiscal expansion. Elsewhere, the Bank of Japan remains a developed markets anomaly, raising interest rates amid persistent inflation.
China’s Central Bank Open to Providing More Support
The People’s Bank of China kept its key lending rates unchanged at record-low levels in early 2025. However, policymakers indicated they would adjust monetary policy as necessary to support the nation’s economy. This includes potential reductions to interest rates and bank reserve requirements. Separately, government officials committed to maintaining a proactive fiscal policy to further support the nation’s economic goals. Elsewhere, many EM central banks have been aggressively and successfully combating inflation.
Interest Rates: Yields Stabilize in the Near Term
U.S. Yields Enter a Lower Range Amid Policy Uncertainty
For now, U.S. rates appear more attractive than most global counterparts. Policy uncertainty creates potential headwinds for U.S. growth and will likely keep yields below 4.5% over the near term. Potential tariffs should keep near-term inflation firm and the Fed patient. Ultimately, though, we expect the Fed to cut at least two more times this year as growth disappoints. As these rate cuts come into view, the renormalization of the yield curve should resume after pausing alongside the Fed in early 2025. Looking out further, easier Fed policy and the potentially positive effects of Trump administration policies could lead to firmer growth and additional curve steepening.
German Fiscal Expansion a Game-Changer for Yields
While the ECB has been easing, German fiscal expansion and its potential effects on other European economies may keep yields elevated. Alternatively, the BoE remains in an easing cycle as U.K. growth and labor market conditions slow. Unlike Germany, the U.K. has limited fiscal room, and the BoE and financial markets have already accounted for recent fiscal expansion. We still expect the U.K. to outperform other global rates markets.
EM Rates Likely to Follow U.S. Rates Lower
High U.S. interest rates have been the main factor pressuring EM interest rates. In the near term, as the U.S. economy slows, the Fed eases further, and U.S. rates decline, we believe more EM central banks will follow suit to defend their currencies. EM rates markets offer opportunities that we think are potentially attractive against this backdrop.
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International investing involves special risks, such as political instability and currency fluctuations. Investing in emerging markets may accentuate these risks.
Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.
Historically, small- and/or mid-cap stocks have been more volatile than the stock of larger, more-established companies. Smaller companies may have limited resources, product lines and markets, and their securities may trade less frequently and in more limited volumes than the securities of larger companies.
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Generally, as interest rates rise, bond prices fall. The opposite is true when interest rates decline.
Past performance is no guarantee of future results. Investment returns will fluctuate and it is possible to lose money.
The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.