It's been a volatile two months since ‘Liberation day’. The ebb and flow of sharply different US tariff regimes, as President Trump continues to bully the world for a better trade deal, has whipsawed economists’ forecasts for the year ahead. Our initially constructive outlook turned near recessionary as the US and China went head-to-head, before de-escalation. The US imposts on the rest of the world via ‘reciprocal’ tariffs also added to the gloom, before they too received a stay of execution. With markets rebounding to levels prior to ‘tariff day’, now stretched US equity valuations imply the earnings outlook is once again benign.
But is this true, or even likely? Over coming months, the global outlook will undoubtedly be impacted by key geo-political events, from the unknown outcome of tariff negotiations and progress on Trump’s ‘Big, Beautiful (tax) Bill’ to the impact of Japan’s election on bond yields. What is known, however, is the existence of significantly greater dispersion in the growth outlook across economies and regions for the year ahead. The US is deteriorating, Europe is navigating, Japan is reinvigorating, and China is stimulating. For now, Australia is vacillating, hoping for courage from a re-elected government with the political capital to spur growth.
The ebb and flow of sharply different US tariff regimes, as President Trump continues to bully the world for a better trade deal, has whipsawed economists’ forecasts for the year ahead.
Coming into this year, we held a constructive macro view. Global growth was slowing but not collapsing and while inflation needed to fall further, its steady progress lower was still giving central banks scope to continue their modest interest rate cutting cycles. Not the worst backdrop for markets, even if we suspected volatility was going to be elevated under a newly elected President Trump. After 3.3% growth in 2024 (a touch below its 3.5% trend), the health of the consumer and corporate sector (even as high rates were weighing and fiscal impulses were fading) suggested growth was destined to slow only modestly further toward a still decent pace of 3% for both 2025 and 2026. Policy rates for most of the major central banks were likely to transition from peaks near 5% to settle near 3%.
The blow-by-blow of the past two months’ historic tariff and market volatility is well-covered elsewhere. It is fair to argue, as we do, that we’ve passed ‘peak trade uncertainty’, and the outlook has improved from its darkest moments immediately after ‘Liberation day’. Yet, the remarkable near-unprecedented V-shaped recovery in risk markets, in the space of about 21 trading days, begs the question of whether everything is as ‘back to normal’ as markets seemingly suggest? Consensus growth has recovered back to 2.7% for 2025 (only 0.4% below forecasts at the start of the year). And while the risk of US recession has receded, 2025 growth forecasts have been significantly trimmed to around 1% from 2%.
Reflecting this, and after adding to risk in early April near market lows, we trimmed risk in early May after markets rebounded. We remain relatively constructive on the outlook - albeit less so than at the start of the year and expect positive (though ‘average-like’) returns in the year ahead. Nonetheless, we’d still argue there are some key signposts over coming months that will have a material impact on what remains a quite uncertain outlook.
We’ve passed ‘peak trade uncertainty’, and the outlook has improved from its darkest moments immediately after ‘Liberation day’. Yet, the remarkable near-unprecedented V-shaped recovery in equity markets, begs the question of whether everything is as ‘back to normal’ as markets seemingly suggest.
Unless tariffs are reduced below the current ‘minimum 10%’—which seems unlikely—we remain in the 1930s, a likely significant drag on global and US growth.
Market angst has risen surrounding just how stimulatory the Trump tax bill will be, and is reflected in a rising 10-year bond yield…
Other signposts that could impact the macro outlook include Japan’s July election, where concern about undesired fiscal stimulus has been driving Japan’s bond yields to their highest in almost 17 years, and weighing on global bond markets (and Japan’s equity market). Timing around when the sharp collapse in US ‘sentiment’ (or soft) data reveals itself (or doesn’t) in the US’s real activity (or hard) data. And if and when this leads the now ‘patient’ US Federal Reserve (Fed) to start trimming interest rates to support growth. Finally, there are a raft of geo-political hot spots, from Russia-Ukraine and Iran’s nuclear position that have the potential to impact the macro scene over the year ahead.
…concern about undesired fiscal stimulus ahead of July’s election has also been driving Japan’s bond yields to their highest in almost 17 years.
The US economy was already slowing ahead of tariffs. Assuming tariffs aren’t fully removed, growth is likely to slow materially during H2 2025, though a recession should be avoided. The Fed cuts twice in H2 to avoid making matters worse (helping supporting equities higher and bond yields lower) and may takes rates lower toward 3% in 2026…but tax cuts and ‘certainty’ could be antidotes to growth from mid-2026 (and see yields reverse higher).
The US economy was already slowing into early 2025 as income growth pulled back and the prior fiscal stimulus was fading. While Q1 growth contracted (for the first time in three years), this largely reflected a boom in imports to beat expected tariffs. As Q2 got under-way, unexpectedly large ‘Liberation day' tariffs caused disruption to businesses and pushed consumer sentiment more than 30% below end-2024 levels. While recent dispute
de-escalation and modest progress on trade negotiations has eased some of the worst fears for the US macro outlook, significant damage has likely already been done. This suggests US growth will slow significantly (and unemployment rise) during H2 2025.
“The combination of government employee lay-offs, negative migration and, the increase in trade barriers will be too much for the US economy.”
Pleasingly, US inflation was slowing noticeably ahead of tariff impacts, with the Fed’s preferred inflation measure – core PCE – revealing near-zero monthly inflation across March and April. However, with the weighted average tariff now being applied to US imports roughly 15% (up from 2.5% at the start of the year), there is likely to be a sharp (albeit ‘transitory’) spike in inflation over the next several months. With the US economy still delivering ‘firm’ activity data (for now), the Fed has time to be patient, with Chair Powell in early May noting that “for the time being, we're well-positioned to wait for greater clarity before considering any adjustments to our policy stance.”
“For the time being, we're well-positioned to wait for greater clarity before considering any adjustments to our policy stance.”
While we suspect the damage has already been done for growth over the rest of 2025 (see the chart below), the outlook for 2026 will reflect where tariff negotiations settle, the extent tax stimulus supports growth and the time it takes for the Fed to judge lower rates are warranted. Barclays expects year average growth for the US economy of just 1.3% for both 2025 and 2026, while UBS forecasts 1.5%, slowing to 1.2%, respectively.
While we suspect the damage has already been done for growth over the rest of 2025, the outlook for 2026 will reflect where tariff negotiations settle, the extent tax stimulus supports growth and the time it takes for the Fed to judge lower rates are warranted.
After a strong start to 2025, European growth is likely to slow (even contract) in mid-2025 as trade headwinds build. But Europe’s longer-term outlook has significantly improved as Germany’s fiscal belt has been loosened, easing inflation drives interest rate support for households, and lower energy prices (and China stimulus) should support industrial activity.
European growth beat expectations in Q1, holding at 1.2%, above its trend since the GFC. However, recent data is revealing the impact of the rising trade tension (as businesses pause activity). Tariffs of at least 10% are now in place (amidst higher auto tariffs) and absent successful negotiations by early July, tariff rates could ratchet higher to 50%.
Europe is at risk of not securing a US tariff deal by the 90-day deadline, given it suffers from a “collective action problem”, according to US Treasury Secretary Scott Bessent.
But Europe is navigating Trump’s impatience, while the new multi-polar and populist world appears to have spurred the region to embrace a more activist approach to future growth. Not only could Europe benefit from an eventual Ukraine-Russia ceasefire and a multi-decade construction stimulus, the prospect of lower energy prices as global energy demand cools, as well as China stimulus, should support Europe’s significant industrial sector. More importantly, UBS expects “higher spending on defence and German infrastructure to lift Eurozone growth by [an additional] 0.3% in 2026 and 0.4% and 2027”.
The near-term slowing in Europe’s growth, as well as easing inflation, is expected to see the European Central Bank (ECB) cut rates below ‘neutral’ over coming months. After pick-up to 0.8% growth in 2024, UBS expects growth to slow to 0.7% in 2025, before rebounding on fiscal and monetary stimulus to 1.0% in 2026.
“Beijing’s goal is to prevent further deterioration rather than engineer a rebound”.
China’s property sector is showing more weakness, as April data reveals a consumer losing momentum. In the wake of April’s Politburo meeting, May has seen more stimulus. But the goal appears focused on preventing further deterioration than engineering a rebound.
China’s outlook remains highly uncertain in the wake of the unfolding US-China trade war. However, the ‘roll-back’ of the recent tariff spike during negotiations is at least a positive for China’s near-term growth and export demand. But as Barclays Research highlights, after earlier stabilisation in the housing sector, there are now “emerging risks to property investment amid a more rapid deterioration in April-May”. Recent announcements suggest further policy easing is being delivered. Where the trade war settles, and the extent of renewed China stimulus, will impact China’s growth outlook for H2 2025 and 2026.
For now, analysts are writing up China’s growth outlook from the lows at the peak of the trade tensions in April. That said, at around 4% for 2025 (according to Barclays and UBS) and risk of slower growth in 2026 (with UBS at 3.5%), China’s growth is significantly slower than the 6% prior decade average. While remaining a significant contributor to global growth, the ongoing trade dispute with the US is likely to see global trade channels evolving over coming years (with ‘excess’ US goods imparting deflation elsewhere).
While China should remain a significant contributor to global growth, the ongoing trade dispute with the US is likely to see global trade channels evolving over coming years (with ‘excess’ US goods imparting deflation elsewhere).
Japan is emerging from three decades of secular stagnation. While 2025 growth is likely hit by the global trade and tariff dispute, better domestic activity on renewed wage growth, as well as fiscal stimulus and corporate reforms, should see an improving growth trend ahead.
Growth in Japan is likely to take a step back in mid-2025, as it faces tariff headwinds (estimated to be currently around 14%) and the potential impact of reduced global trade (more than 20% of Japan’s annual output). Nonetheless, confidence remains that Japan is exiting three decades of secular stagnation, driven by a structural uplift in wages growth. Fiscal stimulus and corporate reforms are further enhancing productivity and investment.
Expected annualised growth of more than 1% in Q2 2025 (according to UBS) is likely to give way to weaker H2 growth. While official interest rates were raised to 0.5% over the past year, weaker near-term growth likely delays any further rate hikes into 2026. After just 0.2% in 2024, UBS expects growth to rise to 0.6% in 2025 and 0.5% in 2026.
Confidence remains that Japan is exiting three decades of secular stagnation, driven by a structural uplift in wages growth. Fiscal stimulus and corporate reforms are further enhancing productivity and investment.
Australia’s outlook remains heavily conditioned by global events such as tariff outcomes and China’s stimulus, and by the extent that global growth slows. That said, we expect signs of recovery since late 2024 to strengthen and for growth to pick-up to a sub-trend pace, as interest rates are reduced, supporting housing and consumption. Faster growth that drives higher living standards require reform and more business investment.
Australia’s growth slowed sharply into mid-2024 on the back of elevated interest rates. The private sector was arguably in recession and overall growth was a well-below trend sub-1% pace. The economy has shown signs of recovery in late 2024, with Q4 growth rebounding 0.6%, and annual growth rising from 0.8% to 1.3%. Falling inflation, fiscal stimulus and the lagged impact of significant wage gains are likely stabilising consumer activity.
Looking ahead, despite some recent loss of momentum in the domestic activity data during April and May, an expected two further RBA rate cuts to 3.35% in 2025 should also aid stronger consumer and housing activity in the year ahead. House price growth is also expected to lift from around 3% to 6%, while the Australian dollar rises toward USD 0.68. In the 15 years to 2015, Australia averaged annual real growth of 3.0%. For 2025, CBA forecasts growth of just 1.8% (after 1.0% in 2024), while UBS forecasts 1.9%. For 2026, this rises to 2.3% and 2.0%, both still below trend. Sustainably faster growth will require a re-elected ALP government, armed with significant political capital, to deliver long-term reforms that drive greater competition, productivity, and efficiency across our tax system, industrial relations, energy delivery, housing planning and infrastructure, business.
For Australia, sustainably faster growth will require a re-elected ALP government, armed with significant political capital, to deliver long-term reforms that drive greater competition, productivity, and efficiency.
This document has been prepared by LGT Crestone Wealth Management Limited (ABN 50 005 311 937, AFS Licence No. 231127) (LGT Crestone Wealth Management). The information contained in this document is of a general nature and is provided for information purposes only. It is not intended to constitute advice, nor to influence a person in making a decision in relation to any financial product. To the extent that advice is provided in this document, it is general advice only and has been prepared without taking into account your objectives, financial situation or needs (your Personal Circumstances). Before acting on any such general advice, we recommend that you obtain professional advice and consider the appropriateness of the advice having regard to your Personal Circumstances. If the advice relates to the acquisition, or possible acquisition of a financial product, you should obtain and consider a Product Disclosure Statement (PDS) or other disclosure document relating to the financial product before making any decision about whether to acquire it.
Although the information and opinions contained in this document are based on sources we believe to be reliable, to the extent permitted by law, LGT Crestone Wealth Management and its associated entities do not warrant, represent or guarantee, expressly or impliedly, that the information contained in this document is accurate, complete, reliable or current. The information is subject to change without notice and we are under no obligation to update it. Past performance is not a reliable indicator of future performance. If you intend to rely on the information, you should independently verify and assess the accuracy and completeness and obtain professional advice regarding its suitability for your Personal Circumstances.
LGT Crestone Wealth Management, its associated entities, and any of its or their officers, employees and agents (LGT Crestone Group) may receive commissions and distribution fees relating to any financial products referred to in this document. The LGT Crestone Group may also hold, or have held, interests in any such financial products and may at any time make purchases or sales in them as principal or agent. The LGT Crestone Group may have, or may have had in the past, a relationship with the issuers of financial products referred to in this document. To the extent possible, the LGT Crestone Group accepts no liability for any loss or damage relating to any use or reliance on the information in this document.
This document has been authorised for distribution in Australia only. It is intended for the use of LGT Crestone Wealth Management clients and may not be distributed or reproduced without consent. © LGT Crestone Wealth Management Limited 2025.
