Data point to a significant slowdown in economic growth in the first quarter. We now expect full-year economic growth in 2025 to be less than 1%, a decline of one percentage point from our previous forecast.

US trade tariffs have led us to increase our 2025 inflation forecast to nearly 4%. 

We expect the Federal Reserve, the US central bank, to cut interest rates twice in the second half of 2025, each by 0.25 percentage points. This would bring its target for short-term rates to 3.75%–4%, which is 0.25-0.50 percentage points higher than most market participants are expecting by the end of the year. 

In March, the unemployment rate stood at 4.2%. We expect this to rise to about 5% by the end of 2025, up from our previous forecast of 4.5%. 

We anticipate the ‘effective’ US tariff rate² on euro area goods will rise to around 15% this year, which would pull down economic growth. We now expect growth in 2025 of less than 1% and growth in 2026 of about 1%. 

Core inflation, which excludes volatile food and energy prices, was 2.4% in March. We expect core inflation to end 2025 just below 2%. 

The European Central Bank lowered interest rates to 2.25% on 17 April, marking the sixth consecutive quarter-point cut and seventh such cut overall since June 2024. We foresee two more rate cuts this year, bringing the rate to 1.75% by year-end.

We expect growth in the labour market to stall due to a deteriorating growth outlook, with the unemployment rate rising to around 6.5% by year-end from its current record low of 6.1%.

We have lowered our year-end growth outlook to 0.5%, slightly below our previous forecast. Our forecast had already reflected a deterioration in some data, particularly for the jobs market. Tax hikes, relatively high interest rates and a weakening external environment are all weighing on demand. 

Core inflation was 3.4% in March. Looking ahead, we expect core inflation to fall to around the Bank of England’s (BoE’s) 2% target in 2026.

We believe the BoE will continue to cut interest rates by 0.25 percentage points each quarter, ending the year at 3.75% (from 4.5% today).

We expect the unemployment rate to rise to 4.8% by year-end, up from 4.4% in the December to February period.

We expect declining price competitiveness and weaker US demand for Japanese goods to reduce Japan’s economic growth by half a percentage point in 2025, leaving full-year growth of less than 1%. Steady wage growth on the back of strong corporate profits and a shortage of workers should support a recovery in domestic spending and keep core inflation robust at around 2% this year. 

We expect the BoJ to raise interest rates from 0.5% to 1.0% by year-end. However, heightened trade uncertainty means the risks of a lower year-end interest rate are growing.

We have cut our economic growth forecast for 2025 from 4.5% to just above 4% and there is a risk it could be even lower than this. At its latest meeting, the Chinese Communist Party’s Politburo announced supportive policy measures, but we don’t expect these to fully offset the impact of US tariffs.

We expect full-year core inflation to be about 0.5% and headline inflation to be even lower. Although the price of imported agricultural products could rise, that would likely be offset by lower energy and commodities prices due to slowing global growth.