The Fed may continue to pause rate hikes in the coming months

Schroeder said that following the release of shocking inflation data in January, the core consumer price index (CPI) in the United States is expected to remain around 3% in 2025 and 2026. Schroeder is concerned about the trend of inflation. He believes that central banks have limited room for further easing policies. The Fed may continue to pause rate hikes in the coming months to assess the impact of Trump's policies, but still expects the Fed to start raising rates again in 2026.

Schroeder said that Trump's first 100 days in office will still be full of voices as the new administration will move forward on key policy goals. But early signs are in line with his basic assumption that major economic policies will be more moderate than Trump promised during the campaign, paving the way for solid global economic growth of 2.5% and 2.8% in 2025 and 2026 respectively. Global divergence will continue in 2025 as American exceptionalism contrasts with weaker economic growth elsewhere. While there is little evidence that exports to the US will be affected by potential tariffs, the impending trade cycle downturn looks set to be a headwind for export-oriented economies such as the eurozone.

The US will continue to lead the global economy. Consumer spending continues to exceed expectations, and with the labour market still in solid shape, solid real wage growth is expected to drive demand for some time to come. GDP growth is likely to be strong at 2.5% in 2025 and 2.7% in 2026, but this growth is likely to lead to higher inflation.

Inflation remains a concern in Europe

Economic growth in the eurozone should improve as political clouds begin to clear and easier financial conditions drive a recovery in economic activity. Consumption is expected to lead growth, while the contribution of fixed asset investment to growth in 2025 will remain low.

However, inflation remains a concern and is likely to remain elevated as wage growth remains above consensus expectations. As a result, interest rates are unlikely to fall as much as widely expected. Schroders expects the ECB to cut rates by just two more 25 basis points each, leaving the deposit rate at 2.25% in 2025.

UK also appears to be facing stagflation as supply-side constraints limit the scope for faster growth. Schroders expects inflation to climb above 3% later in 2025 and exceed the 2% target throughout the forecast horizon, which will significantly limit the room for the Bank of England to ease monetary policy. Indeed, even though Governor Andrew Bailey said the Bank of England's Monetary Policy Committee would proceed cautiously, Schroders still expects interest rates to fall by only 25 basis points to 4.25% in May.

Emerging market forecasts are mixed

Among other major emerging markets, falling inflation and lower interest rates have brightened the outlook for the Indian economy. Schroders expects growth to start to accelerate in mid-2025.

High uncertainty about US policy

Risks to the forecast remain exceptionally high due to uncertainty about US policy. Schroeder expects that Trump's aggressive policy scenario, namely high trade tariffs and large-scale deportation of illegal immigrants, will cause stagflation in the US economy and may plunge the rest of the world into recession. At the same time, Schroeder is worried that rising US Treasury yields may expose the fiscal weaknesses of other weaker sovereigns such as the UK.

But upside risks are also emerging. DeepSeek may accelerate the application of artificial intelligence (AI), macroeconomic reforms have returned to the agenda of governments eager to seek growth, and bank lending has shown signs of recovery. The sharp drop in oil prices may also ease inflationary pressures later in 2025.