The global economy is entering a period of divergent monetary paths and uneven performance, with the United States facing a more evident slowdown and trade policy developments continuing to influence the near-term outlook, according to Swiss Re Institute’s latest economic and financial risk report.
US economic growth is expected to moderate further in the third quarter of 2025, following a temporary rebound in the second quarter. Labor market indicators, such as the 139,000 jobs added in May, point to stability, but sentiment across households and businesses remains cautious. The report attributes this gap to the ongoing disconnect between soft and hard data.
Uncertainty surrounding the House Reconciliation bill continues to weigh on outlook projections. While the legislation is anticipated to pass later in the summer, its impact on growth could be offset by new trade tariffs and policy unpredictability. Swiss Re expects GDP growth in the US to slip below trend in the second half of the year.
In Europe, first-quarter growth of 0.6% is unlikely to be sustained. Activity in the second and third quarters is forecast to cool as the temporary lift from front-loaded exports in anticipation of US tariffs fades. In China, trade activity remains steady overall, with declining exports to the US compensated by higher volumes to ASEAN economies.
Price movements show regional divergence. In the U.S., core goods inflation reached 0.3% year-on-year in May – the highest since August 2023 – while headline inflation held at 2.4%. In the euro area, headline inflation fell to 1.9%, with a stronger euro dampening import costs. China recorded a 0.1% annual decline in consumer prices, with producer prices falling 2.7% due to weak demand and industrial oversupply.
Interest rate paths are also diverging. The Federal Reserve remains in a holding pattern as it assesses the economic effects of ongoing trade policy developments. Two rate cuts are projected before the end of 2025, in line with expectations for the 10-year Treasury yield to reach 4.2%. In contrast, the European Central Bank reduced its deposit rate by 25 basis points in May, bringing it to 2.0%. The People’s Bank of China continued its easing cycle with a 50-basis-point reserve ratio cut and increased liquidity injections.
Swiss Re’s projections suggest that the US will continue to face inflation pressures, while Europe and China deal with declining prices. The policy gap between regions is expected to widen further.
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