We believe peak tariff uncertainty has passed, and de-escalation could imply growth convergence between the U.S. and other major economies.
The outlook of the U.S. economy depends on tariff cuts, tax cuts and U.S. Federal Reserve (Fed) cuts.
The U.S.-China trade truce has reduced, but not eliminated, recession risks. As it stands, tariff rates have decreased from 23.7% to 13.3%, still higher than the 2.4% at the end of 2024, although fresh European Union (EU) tariff threats have sparked market uncertainty. These tariffs pose challenges to supply chains, profit margins and inflation, with soft data indicating eroding consumer and business confidence. While the impact on growth and inflation is uncertain amid evolving tariff negotiations, concerns about potential stagflation risks in the U.S. are increasing.
Besides trade, lower immigration and spending cuts also impact growth. The current fiscal bill in Congress offers growth with front-loaded tax cuts and back-loaded spending cuts. Recent policy developments have eased financial conditions, increasing the central bank’s patience on monetary policy rate cuts. Its readiness to cut rates when economic data weakens is crucial to avoiding a recession.
In short, U.S. economic growth is expected to slow, narrowly avoiding a near-term recession, while long-term growth faces challenges from lower immigration, higher deficits and modestly higher inflation.
We believe peak tariff uncertainty has passed, and de-escalation could imply growth convergence between the U.S. and other major economies. While 2H25 remains uncertain, recent monetary policy activism in response to lower core inflation and downside growth risks outside the U.S. should boost sentiment among corporates and households. Tariff de-escalation suggests easing near-term growth pressure in China, which has unveiled a comprehensive monetary policy stimulus package including liquidity injections and interest rate cuts. Adequate fiscal space allows policymakers to roll out pro-growth measures to stimulate domestic demand should external growth headwinds intensify. Moreover, U.S. chip technological restrictions could influence China’s push toward self-reliance in artificial intelligence (AI). Meanwhile, Japan’s economic recovery is likely to continue in 2H25, supported by resilient domestic demand as solid wage growth could offset inflation concerns. The AI trend is likely to continue to benefit North Asian economies through sustained chips demand given the dominance of these tech powerhouses in high-bandwidth memory (HBM) chips, as is the case in Korea. While fiscal room may be limited in some parts of Asia, Korea’s domestic demand could benefit from the supplementary budget announced after June’s presidential elections.
Relative to the U.S., Europe’s accommodative fiscal posture, particularly in Germany, could warrant an increase in defense spending and mobilization of the Infrastructure Fund. Policy rate cuts by the European Central Bank (ECB) could provide further support. Thus, while global growth risks are skewed to the downside due to trade uncertainties, the fiscal-monetary policy mix could mitigate some potential slowdown in economies outside of the U.S.