U.S. trade policy has a huge impact on the global economy. Barclays: it may slow down this year but not decline.

Barclays Julian Lafrage (Chief Market Strategist, London, UK) and Lucas Gairinger (Head of Quantitative Macro and Themed Strategies, Zurich, Switzerland) stated in a research report that due to the significant impact of the drastic changes in US trade policy, the global economy appears to slow down this year, but will not fall into recession. In the US, the economy is significantly affected by tariff uncertainties, with the GDP growth forecast for 2025 lowered from 2% to 1.4%, and inflation expectations rising to 3%. Although short-term CPI data has improved, tariff drag could lead to a technical recession, and the Federal Reserve may cut interest rates more significantly to the neutral rate of 3%. In the Eurozone, Germany's potential turnaround with a 500 billion euro infrastructure plan is overshadowed by the "international leak" effect of defense spending weakening the fiscal multiplier. Barclays' main points are as follows: US: Moving forward with difficulty The uncertainties related to tariffs mentioned in the "Outlook for 2025" are more significant than expected by any standard. Economists have been revising their inflation forecasts every week due to this. The current consensus is that US GDP growth in 2025 will slow from over 2% at the beginning of the year to 1.4%. On the other hand, inflation expectations have increased, with economists now forecasting a 3.0% rise in consumer prices, much higher than the 2.5% expected six months ago. This inflation situation is unusual but also subject to change multiple times between now and the end of the year. The belief that the inflation decline in 2025 may be faster than expected has proven to be accurate. In fact, the US Consumer Price Index (CPI) from February to April was below consensus expectations. Ultimately, expectations will catch up with reality, with a series of better-than-expected data likely to appear this summer as the impact of tariffs becomes evident. But the overall situation remains unchanged Inflation is unlikely to soar to levels that would cause panic among investors and policymakers; the trend of price increases is at a slower pace. The growth prospects are extremely uncertain. The US economy may fall into recession, but it is not inevitable. If US GDP shrinks for two consecutive quarters, it would be a technical recession, driven by factors that are expected to reverse quickly (such as a significant increase in imports) or relatively mild factors. In general, as long as tariffs continue to drag down, the US economy may continue to struggle, a term usually used to describe the economic situation in the EU. In this context, the Federal Reserve will maintain patience. However, Barclays believes that the Fed should be less affected by short-term noise, focus on the longer-term situation, and see the big picture rather than getting caught up in details. In other words, whether the Fed cuts rates in September or December is not that important. The key is that interest rates should fall in the coming months, and perhaps more significantly than currently expected. Interest rates around 3% should be neutral for the US economy and not seen as contractionary. This is the level of neutral rates that Barclays believes in and expects the Fed to cut rates towards this level in the medium term. Meanwhile, long-term bond yields are likely to continue to be influenced by Washington policy fluctuations and concerns about US debt issues. However, policymakers cannot ignore the fixed income market. A sharp rise in bond yields should trigger a hawkish response in the fiscal side. Eurozone: Suppress your enthusiasm Entering 2025, investors have low expectations for the Eurozone, largely depending on the ability of the German government to relax fiscal control, as emphasized in Barclays' "Outlook." The German government has indeed made significant moves in this regard. Although the trade tensions have tarnished the luster of the 500 billion euro infrastructure investment fund proposed by German Chancellor Franz Mertz and other stimulus measures, these measures may still be a game-changer for the Eurozone. Economists, however, have been lowering their expectations for the Eurozone. They have reduced the actual GDP growth forecast for 2025 from 2.1% at the end of last year to 0.8% now. While this performance may not be better (or worse) than the US, the two are indeed very close a situation that is not common. Stronger firepower One explanation could be that it takes time for Germany's plans to materialize, and the benefits to other economies in the Eurozone may be limited. The fiscal multiplier (the additional growth in GDP expected for every euro spent on defense) has been studied for the US economy, with estimates ranging from 0.4 to 0.9. However, the US defense budget has primarily been spent domestically, while much of the Eurozone's defense spending tends to flow abroad. Therefore, the capacity to absorb additional spending is limited, and the "international leak" may have a negative impact on the fiscal multiplier. In other areas of the Eurozone, Spain continues to be a highlight, with economic growth expected to exceed 2% this year, while France and Italy highlight the Eurozone's entrenched weak growth prospects. Or perhaps economists are once again playing out the scenario where they switch from victory to defeat in Eurozone economic forecasts. Despite the short-term outlook for growth remaining bleak, the Eurozone is on the right track, as is inflation. In May, the overall Consumer Price Index (CPI) fell below the European Central Bank's (ECB) target level, although the target for core prices has not been met. This trend should continue in the second half of 2025, with some bumps expected. Therefore, the ECB should have the ability to cut rates in the second half of 2025. As long as US tariffs do not completely destroy global trade, the current market pricing of a 25 basis point rate cut in 2025 appears reasonable. In fact, the European economy still largely depends on other regions of the world. In the long run, even more additional tanks or fighter jets won't change that fact. UK: Moving in the right direction Barclays originally expected 2025 to be a challenging year for the UK economy, and the first five months have not been too optimistic. However, the recent momentum has turned positive, with stable economic growth and a decrease in inflation. This has not yet been reflected in economists' forecasts, as they expect the UK's real GDP growth in 2025 to be around 1%, much lower than the consensus forecast of 1.5% in January. Nevertheless, due to stronger-than-expected growth, strong private consumption, and a significant boost in inventories in the first quarter, the risks for the remaining time of the year now lean towards the positive. The UK has become the first country to secure a trade agreement with the EU, eliminating much uncertainty that other countries still face, further strengthening this optimistic sentiment. "The UK economy is moving towards long-term economic growth potential of around 1.5%." A mixed situation The inflation situation is more complex, with several one-time factors (National Insurance contributions, revised cost of living, wage increases) causing some short-term fluctuations, pushing the Consumer Price Index (CPI) above 3% in April. However, the gradual loosening of the labor market should slow down the pace of price increases, especially in the service sector. This puts the Bank of England (BoE) in a difficult position what central bank officials call "gradual actions." While expecting a 25 basis point rate cut in December this year may be overly optimistic, such a rate cut seems possible. This should be enough to provide much-needed support to consumers and businesses. The Bank of England's terminal rate (as indicated by Barclays' estimate of neutral rates) is 3%. With further easing policies and improved market sentiment, the UK economy is moving towards long-term economic growth potential of around 1.5%.