2025 mid-year international economic outlook

Summary

Forecast changes

• We revised our global GDP forecast higher and now forecast the global economy to grow 2.7% in 2025, up from 2.3% last month. Improved prospects for global growth stem from reduced trade tensions, particularly between the U.S. and China, although a still-resilient U.S. consumer also plays a role in our global GDP revision. Of note, a 0.40 percentage point increase in our global GDP forecast in one month represents a very significant change in such a short period of time.

• Our U.S. economists believe the American economy is also on a steadier foundation, and we now forecast the U.S. economy to grow ~1.5% this year. Recession risks have not totally diminished; however, a stronger U.S. economy also leads us to believe the Fed will adopt a more cautious approach to easing monetary policy. We now believe the Fed will resume the easing cycle with a 25 bps rate cut in September, and settle on a terminal fed funds range of 3.50%-3.75% by the end of this year.

• Aside from our Federal Reserve forecast change, we have not made material adjustments to our foreign central bank forecasts. With that said, renewed geopolitical tensions in the Middle East represent an upside risk to our policy rate forecasts. Oil prices have jumped over the last week amid military confrontation between Israel and Iran, and if energy prices remain elevated, easing cycles could be disrupted, especially for central banks in emerging markets.

• Depreciation pressure has been applied to the U.S. dollar over the first half of this year, and as we head into H2, we expect dollar depreciation to persist. A Fed cutting rates quicker than most G10 peers, subdued U.S. economic trends and reduced trade tensions should all contribute to a weaker dollar in the next few quarters. However, we continue to believe the dollar can reverse course and strengthen in 2026 as monetary policy and growth trends favor the United States.

Key themes

• Financial market developments were in focus over the first half of this year. However, we believe economic trends will take center stage in H2-2025 as the full impact of tariffs has yet to be realized. To that point, we expect the U.S. economy to experience little growth in Q3 and Q4, and for international economies to experience subdued growth in the second half of this year as tariffs bite. Rather than focusing on financial markets, attention is now likely to shift toward the health of the global economy and individual economies.

• With economic trends to be top of mind, central bank activity should also become paramount from here. In our view, the Fed is likely to cut rates 75 bps in H2-2025, while most G10 policymakers are nearing the end of their respective easing cycles. Policymakers in emerging markets are likely to remain comfortable lowering interest rates which, in aggregate, is a dynamic that places the Fed, G10 and EM central banks adjusting rates at different speeds, and in select cases, directions.

• We forecast a weaker dollar through the end of this year; however, we continue to hold an unwavering view that the U.S. dollar will be the world's reserve currency for the foreseeable future. Dollar depreciation is not synonymous with de-dollarization. In 2026, we continue to believe the dollar can strengthen against most currencies as interest rate and economic growth trends move in favor of the greenback.

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