Robust economies despite political noise

Considering all the political turbulence, economies have fared well this year. GDP data for the first half of the year is in many places distorted by the so-called front-loading effect, but still, the fact that e.g. euro area economic growth has topped expectations this year is quite remarkable. The US economy similarly stands on a solid footing, albeit that inflation risks are now clearly tilted to the upside. In China, we have revised up our economic forecasts as performance particularly in the beginning of the year was stronger than initially expected. Read more on our updated economic projections in Nordic Outlook: Caution, not Crisis, 3 September 2025.

Regardless of trade war -related uncertainty, the global manufacturing sector has recently showed signs of improved momentum. The downturn in the global manufacturing cycle has lasted for three years by now as the pickup has been delayed time and time again. In August, manufacturing sector in the euro area recorded growth for the first time since June 2022. In the US, the manufacturing PMI increased from 49.8 to 53.0 in August.

As the service sector is also still holding up in the expansionary territory, large economies particularly seem well on track to grow at more or less their structural growth rates over the coming year. In the euro area, growth will likely initially slow down in the second half of the year, also as the front-loading effect reverses, but will pick up pace again next year. In the US, fiscal tightening from higher tariffs will hamper growth this year, but already during winter, we expect the front-loaded stimulus from the “One Big Beautiful Bill” to boost the economy.

The changed inflation outlook in the US leaves the Fed in a difficult position, also as political pressure to cut rates has been intensifying lately. In principle, tariffs should only trigger a temporary level shift in prices, but several indicators recently have led us to think that more persistent price pressures might be brewing. Inflation expectations have creeped higher to which retailers and wholesalers have responded with pre-emptive price hikes. Add the fiscal boost as we enter next year, and inflation risks in the US are tilted to the upside.

In contrast, in the euro area, it seems safe to say that the battle against inflation is over. In fact, early next year, headline inflation is likely to markedly undershoot the ECB’s 2% target. The ECB seems to be fine with that, though, and considering the reduced trade policy uncertainty and better-than-expected macro performance, we have changed our ECB call over the summer. We think the ECB is done cutting rates and see the deposit rate at 2% over our forecast horizon.

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