06.19.2025
APPROPRIATELY SLOW
In the US, our growth baseline remains largely unchanged. Almost the totality of incoming data point to 1) a technical rebound in growth in Q2, driven primarily by a payback in net trade and 2) solid income growth that should help sustain consumer spending and, in turn, keep the US economy out of recession.
In the EA, although Q1 real GDP growth was revised upwards, we note that distortions from anticipatory effects on US tariffs and idiosyncratic factors (Ireland) were significant. Beneath the surface, domestic demand remains feeble entering Q2. Our baseline remains largely unchanged. We continue to expect sequential growth to slow in the coming quarters.
In China, soft data for May suggest that domestic demand conditions remain challenging, with weak consumption figures and sluggish housing activity expected for the month. Additionally, export-driven manufacturing indicators point to a slowdown in momentum, consistent with disappointing trade figures in May. Overall, we anticipate a broad slowdown in Q2, as economic imbalances persist.
In the US, the May inflation print still shows no significant evidence of tariff pass-through to consumer prices. This aligns with our initial assumptions that the disinflation trend would continue through the summer, supported by Q1 restocking. We continue to expect tariff-driven inflation momentum to pick up in June and peak over the summer as businesses exhaust inventories built before the tariffs took effect. That said, we maintain the view that the projected increase in goods inflation will be temporary. From Q4 onward, we expect core services’ disinflation to regain dominance in the inflation outlook, leading overall inflation to reach target by Q2 next year.
Headline EA inflation fell below target in May, with core inflation declining significantly due to weak services, reflecting very soft tourism-related components as well as a broader underlying easing. Multiple indicators continue to suggest that the disinflation trend is consolidating. Accordingly, we maintain our baseline forecast that core inflation will continue to decline toward the target by December 2025.
In China, persistent deflationary pressures kept inflation negative for the fourth consecutive month in May, while overcapacity continued to weigh on producer prices. Prolonged trade tensions have dampened business sentiment, and domestic prices are likely to remain weak amid ongoing excess capacity and limited support from redirected exports.
Monetary-policy wise, we remain of the view that the Fed will cut the rates twice this year starting in Q3.
For the ECB, we maintain our forecast of two additional rate cuts this year, though risks are now balanced (versus potentially three cuts in total previously) given growing divisions within the Governing Council, compared to previously expecting risks skewed toward three cuts.
For the PBoC, we expect another 40bp in policy rate cuts later this year, although no further reserve requirement ratio (RRR) reductions are likely during the summer. The scale and timing of additional easing will depend on how the economy responds to tariffs, as the 90-day US–China de-escalation period should provide the central bank with more time.
FABIO FOIS
Head of Investment Research & Advisory
VALERIO CEOLONI
Senior EM/FX Strategist
CHIARA CREMONESI
Senior Rates Strategist
MATTEO GALLONE
Junior Macroeconomist
FRANCESCO PONZANO
Junior Equity Strategist
COSIMO RECCHIA
Senior Equity Strategist
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