Tariff impact set to intensify towards winter
|The US economy has continued to evolve well in line with our expectations, and we make only small adjustments to the forecasts. While current tariff levels are slightly higher than we expected in early summer, more front-loaded stimulus from the 'Big Beautiful Bill' and recent easing in financial conditions mitigate downside risks to growth.
We forecast 2025 GDP growth at 1.6% (unchanged) and 2026 at 1.4% (from 1.3%). In quarterly terms, we think majority of the negative tariff impact on growth will be felt over Q3 and Q4 and expect sequential growth to recover towards 2026.
Inflation is also developing in line with our earlier forecasts. While strictly tariff-driven inflation has so far been limited, majority of increased costs will be passed through to consumer prices only towards the fall. We maintain our headline inflation forecast at 2.8% in 2025 (unchanged) and 2026 at 2.6% (unchanged), and our 2025 core inflation forecast at 3.0% in 2025 (unchanged) and 2026 at 2.8% (unchanged).
We still expect the Fed to resume 25bp rate cuts from September and follow up with quarterly reductions until a terminal rate of 3.00-3.25% is reached in September 2026. We see increasing two-sided risks around the policy rate outlook. Elevated inflation expectations, easier financial conditions and more supportive fiscal policies could force the Fed to delay rate cuts further, while political pressure could have the opposite effect.
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