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A fog in the future – Global Economics Quarterly
2025 has seen ongoing conflicts and geopolitical tensions, unpredictable US trade policies, increasingly precarious fiscal dynamics and growing distrust in US institutions – yet the global economy is muddling through and US profits are holding up.
That has been enough for risk assets to continue to rally, unperturbed by the queue of cases against US administration policies at the Supreme Court or the scattergun of a ‘dot plot’ from the Federal Reserve’s FOMC members showing everything from a rate rise to another 125bp of rate cuts before the end of 2025.
Even though it is not certain that the fog will clear, global markets have seemingly stopped trying to anticipate what outcomes could be on the other side. That does not mean markets won’t be vulnerable if decisions are taken that result in a renewed rise in inflation expectations.
So what does this backdrop mean for our forecasts?
Trade growth was stronger than expected in the first half of this year, but payback from the US frontloading as well as the introduction of 50% tariffs for India and Brazil in August, means most countries’ goods exports to the US will likely slow a lot more, although trade elsewhere will likely be more resilient. What’s more, the final months of 2025 could also see further increases in US tariffs on sectors such as pharmaceuticals and semiconductors. Globally, services trade will likely continue to fare better than for goods.
The timeline of key tariffs in 2025 and to come
For monetary policy, we still forecast only another 50bp of cuts from the US Federal Reserve, which is facing the challenge of upside risks to inflation and downside risks to the labour market. This is fewer cuts than anticipated by markets: we think a relatively robust US economy and sticky inflation in the US, coupled with bond and currency market pressures, will likely limit the scope for easing.
Elsewhere, we believe the European Central Bank has stopped cutting. We also now see the Bank of England on pause until next April, and expect one rate rise from the Bank of Japan at its next meeting on 30 October.
Our global inflation view is unchanged. We still think the supply shocks from US tariffs and lower immigration are likely to mean sticky US core inflation, even as growth slows, and view US trade policy as primarily a demand shock for the rest of the world that is disinflationary.
We have revised our global growth forecasts up a touch, reflecting some stronger outcomes in many countries in the second quarter of 2025 rather than an improving outlook. The biggest upgrades are to India, parts of ASEAN and Mexico. Still, we see global GDP growth slowing from 2.8% in 2024 to 2.6% in 2025.
2.6%
Global growth forecast for 2025, HSBC
2.5%
Global growth forecast for 2026, HSBC
We have also extended our forecasts to 2027 but there are inevitably risks.
The key upside risk to growth is artificial intelligence. In 2027, any boost would be more likely to come from the demand side via continued rapid investment spending rather than the supply side, given most literature suggests the biggest productivity gains will not be felt until the early 2030s.
The key downside risk relates to the high level of government debt. Whether near-term questions about French and UK budgets or longer-term worries about US deficits and Japanese debt, market concerns about fiscal sustainability seem here to stay.
Would you like to know more? You can listen to a special edition of The Macro Brief podcast, where we discuss how the world economy is muddling through despite substantial challenges.
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Would you like to know more? You can listen to a special edition of The Macro Brief podcast, where we discuss how the world economy is muddling through despite substantial challenges.
