07.25.2025
NEXT, PLEASE
In the US, incoming data remain broadly consistent with our baseline. We maintain the view that the economy will bounce back in Q2 amid a reversal in net trade contribution. Meanwhile, we continue to expect growth to soften in Q3 before beginning to recover, albeit slowly, in Q4. In a nutshell, we continue to expect significant volatility in growth data, yet not a recession.
In the EA our baseline remains unchanged. Incoming data suggest that activity remained subdued in Q2, due to the reversal of the idiosyncratic factors that supported growth in Q1. Looking ahead, between Q3 and Q4, we expect growth momentum to improve only very modestly after the Q2 payback, supported by the gradual decline in uncertainty and a recovery in foreign demand as adverse tariff effects fade. We continue to expect growth of 1.1% in 2025.
In China, better-than-expected GDP data for Q2 imply that short-term growth fears have subsided somewhat, owing both to strong exports (helped by frontloading) and to early government stimulus. Nonetheless, looking at hard data for June, domestic momentum slowed during the month. Overall, economic headwinds have not dramatically abated in China: on the one hand, trade confrontation with the US has eased; on the other hand, domestic demand continues to struggle.
The June US core CPI report came in softer than expected. Core goods returned to positive territory, driven by a still modest and mixed tariff pass-through effect. Core shelter continues its normalising trend, while supercore inflation remained relatively subdued. We continue to expect tariff-driven inflation momentum to peak over the summer as businesses exhaust inventories built up before the tariffs took effect. That said, we maintain our view that the projected increase in goods inflation will be temporary. However, if the limited pass-through persists into July, we highlight a moderate downside risk to our already low CPI forecast. From Q4 onwards, we expect core services disinflation to regain prominence in shaping the inflation outlook, bringing overall inflation to target by Q2 next year.
The June print confirmed that the EA inflation outlook is broadly on target. The slight increase in services inflation was led by volatile components and was offset by a slight decrease in core goods. Taking into account the decelerating momentum of underlying services, the ongoing normalization of wage growth, and the softening of consumer inflation expectations, we maintain our baseline for a disinflation process that will continue throughout the year.
China’s inflation turned slightly positive in June. Deflationary pressures are expected to persist into 2025, amid continued weakness in domestic demand.
Our monetary policy outlook is largely unchanged. In DMs, we continue to expect both the Fed and the ECB to cut rates twice this year.
The ECB left the depo rate unchanged at 2% in July – the first pause after seven consecutive rate cuts. As incoming data remains broadly in line with the June assessment, President Lagarde reiterated that the ECB is in a good place and can afford to stay on hold to observe how conditions develop, especially regarding tariffs. That said, we maintain our view that the ECB will implement two additional rate cuts by the end of the year, bringing the depo rates to 1.50%, as we anticipate continued weak growth and a faster pace of disinflation than the ECB
currently expects. While the German fiscal package may offer some support to the euro area economy, its effects are unlikely to be felt until 2026.
The PBoC is expected to pause monetary easing over the summer, resuming further rate and RRR cuts in early Q4 as growth concerns re-emerge
FABIO FOIS
Head of Investment Research & Advisory
MATTEO GALLONE
Junior Macroeconomist
VALERIO CEOLONI
Senior EM/FX Strategist
CHIARA CREMONESI
Senior Rates Strategist
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