The Federal Reserve (Fed), the US central bank, kept interest rates at 4.25%–4.5% in its first meeting of 2025 and we think it will bide its time before making further rate cuts.

The euro area’s weak growth outlook and relatively low inflation is likely to encourage the European Central Bank (ECB) to cut rates further in 2025. Following Germany’s recent election and with the potential for peace negotiations over Ukraine, uncertainty is high.

In the UK, there are signs of ‘stagflation’ – the economy is experiencing minimal growth and inflation is rising. 

Investor sentiment in China is improving, bolstered by the emergence of artificial intelligence (AI) start-up DeepSeek and a significant rise in China’s main stock market from a September 2024 low. 

United States

Economic growth: We expect US economic growth to remain above 2%, reflecting anticipated changes in trade and immigration policies.

Interest rates: We expect the Fed to cut interest rates twice in the second half of the year. This is a change from our previous forecast of rate cuts in the first half, reflecting the recent strong employment and inflation reports. 

Inflation: We believe that inflation will remain in focus. A recent survey¹ indicated that consumers expect inflation to be 4.3% over the next year, up from 3.3% January. It isn’t clear whether this reflects a real sign of what is to come or is simply noise amid interest-rate uncertainty. 

Employment: We expect the unemployment rate to rise slightly to the mid-4% range in 2025. However, if there are more labour shortages than expected, unemployment could fall and wage growth and inflation might rise.

Euro area

Economic growth: We expect the euro area to grow by around 0.5% in 2025. Continued weakness in the manufacturing sector is likely to weigh on demand. The prospect of additional tariffs from the US will likely dampen consumer and business sentiment.

Interest rates: The ECB is likely to cut interest rates by 0.25 percentage points at each meeting until July and then hold rates at 1.75%. The current rate is 2.75%.

Inflation: We expect both headline inflation and core inflation (which excludes volatile food and energy prices) to be below 2% by the end of 2025.

Employment: The unemployment rate stood at 6.3% in December. We expect it to rise towards 7% by the end of 2025. 

United Kingdom

Economic growth: We expect the UK economy to grow by about 0.7% in 2025, down from our previous forecast of 1.4%. This is partly due to weaker forward-looking data, especially in the job market.

Interest rates: We expect the Bank of England to cut interest rates each quarter. This would leave rates at 3.75% at the end of the year, down from 4.5% today.

Inflation: We think headline inflation will be 2.5% and core inflation will be 2.7% by the end of 2025. Both forecasts are 0.3 percentage points higher than our previous estimates.

Employment: We expect the unemployment rate to rise to 4.7% by the end of the year, up from 4.4% in the October-to-December 2024 period.

Japan

Economic growth: We expect Japan’s economy to grow by around 1.2% in 2025, driven by an increase in domestic demand as wages rise faster than inflation. 

Interest rates: We continue to expect the Bank of Japan to raise interest rates to 1% by the end of 2025, up from 0.5%.

Inflation: We believe that core inflation will stay robust at about 2% in 2025.

Employment: Japan is facing a shortage of workers, which is likely to keep pushing wages up.

China

Economic growth: We expect a short-term boost to economic growth, but it will likely slow to about 4.5% this year due to trade tariffs.

Interest rates: We expect increased government support, including a one-off increase in the debt ceiling, to address local government debt and excess housing supply.

Inflation: Core inflation is expected to be about 1.5% this year, driven by a weaker currency from higher tariffs. However, producer prices were down 2.3% year-on-year in January, marking the 28th consecutive month of decline.

Employment: We expect the unemployment rate to stay at 5.1% in 2025.

Emerging markets

We expect more interest rate cuts in 2025, but rates will still be relatively high because a strong US dollar could lead to higher inflation. Trade developments are likely to be a major focus throughout the year.

¹ A survey from the University of Michigan.

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