Global Economic Overview – September 2025

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Global

It is now nearly six months since the ‘Liberation Day’ announcement of huge tariff hikes by US President Trump. Although, following some U-turns, deals and changes, the average tariff rate for imports into the US – assuming the same trading pattern as in 2024 – is not quite as high now as it looked on 2 April, we calculate it is still a whopping 15.4%pts higher than in 2024. Even so, the global growth impact of this is not expected to be huge. Our global GDP growth forecasts for 2025 and 2026 are currently 3.3% and 3.1%; in March they were 3.2% and 3.2%. Weighting consensus forecasts in the same way, the current forecasts of 3.2% and 3.2% compare with 3.2% and 3.3% in March (Chart 1). This speaks to resilience.

Chart 1: Global GDP growth forecasts suggest resilience to sharply higher US tariffs



*Weighted using IMF weights to calculate a Global GDP forecast.
Source: Consensus Economics, Investec Economics

A key reason why is the lack of retaliation, averting a trade war. Another is trade diversion. Whilst the extra 29%pt US tariff placed on China is harming its exports to the US, the rest of the world is snapping up Chinese goods. According to Chinese customs figures, exports to the US fell by 33% y/y in August, but total export growth rose by 4% y/y as exports to ASEAN nations and Europe climbed. Data by China’s trading partners broadly match this pattern (Chart 2), confirming trade diversion looks to be emerging. Although these figures could be distorted by some front-loading, the relocation of Chinese production to Vietnam and Thailand by companies such as Nike, which began in Trump’s first term, is accelerating too.

Chart 2: Rising exports to the rest of the world more than offset lower Chinese exports to the US



*Data is for August, except US, Thailand, India, Indonesia, Australia, EU and Hong Kong where July is latest.
Source: Macrobond, Various customs agencies, Bank Indonesia, BOT, Japan MOF, SingStat, DOSM, US Census Bureau, Eurostat, Investec Economics

Markets have overcome the initial tariff shock as well. The performance of the S&P 500 is illustrative. At its post-‘Liberation Day’ trough on 8 April, it was down 11.5% from 1 April levels. These losses were reversed by 8 May. Subsequent gains have meant the S&P500 is now trading 17.8% above its 1 April level. Research by BIS staff* attributed this performance to other factors dominating the tariff shock, which itself still weighed on the index, at least as of late July, the end point of the BIS study (Chart 3). These ‘other shocks’ that have instead driven shares higher, at least in USD terms, appear to be better than expected earnings reports and to date resilient macro data. We do wonder though whether markets are ‘priced to perfection’.

Chart 3: The initial rebound in the S&P came because of tariff news; later gains, despite them



*BIS Quarterly Review, September 2025
Source: BIS, Macrobond, Investec Economics

The performance of other equity markets has almost matched this: the MSCI World index, of which US stocks make up 72%, is up 17.5% (in USD) from 1 April. Impressive though that is, other asset classes stand out even more. Bitcoin, which had fallen much as stocks did in early April, bounced back very strongly afterwards, with cumulative gains from 1 April of 33.1% (Chart 4). CoinMarketCap put cryptoassets’ market cap at US3.8tr now, close to doubling on the year, vis-à-vis a global stock market cap of c.$127tr.  We wonder whether the crypto market is now large enough that such gains visibly boost stock markets too via portfolio rebalancing and maybe also support consumption via wealth effects.

Chart 4: Bitcoin’s performance since ‘Liberation Day’ leaves equities and gold behind



Source: MSCI, S&P Global, London Bullion Market Association, Macrobond and Investec Economics

Yet in other markets we detect lingering caution with regards to US assets – most so where deep and liquid alternatives are available, least so where they are not. We would put gold – as an alternative ‘safe haven’ – and FX into the former category and bonds into the latter. As for gold, having outperformed stocks sharply during April, in a classic risk-off move, more unusual is that the gold price took another big step up in late August and in September whilst equities rallied. Similarly, since 1 April, USD is down by 4.9% in trade weighted terms and by 8.0% vs EUR, its most obvious alternative. By contrast, greater fragmentation in non-US bond than FX markets (Chart 5) may be one reason why USD bonds have held up fairly well.

Chart 5: In FX markets, investors’ alternatives to USD are less fragmented than in bond markets



*In USD terms. Data for FX market is 2022, data for bond market is Q1 25.
Source: BIS, Investec Economics

Yet that non-US bonds have not outperformed remains driven mainly, in our view, by the shift in geopolitics that the Trump administration has unleashed. This month, the incursion into NATO’s airspace by Russian drones and planes showed the imperative of Europe urgently lifting defence spending. This will necessitate diverting public funds away from competing demands for spending that population ageing is only adding to. Tax rises too may be needed. It presents extra risks that this comes at a time when public dissatisfaction with centrist politics is high. That said, the EU Commission at least can take comfort from the fact that trust in it has surged to high levels since Mr Trump’s return to the White House (Chart 6).

Chart 6: Trust in the EU Commission has risen since President Trump has taken office again



Source: EU Eurobarometer, Macrobond, Investec Economics

United States

September’s FOMC decision was less contentious than feared; in the event Governor Miran was the sole dissenter, voting for a 50bp cut. The remainder of the voting members backed Chair Powell with a 25bp reduction, taking the Federal funds target range to 4.00-4.25%. This gives a false picture of unanimity on the committee, however. The dispersion of dots in the updated dot plot (Chart 7) reveals clear differences in opinion between committee members on the appropriate path for rates. In trying to balance the growing downside risks to the labour market against the upside risks to inflation, we think the majority will vote for one further cut this year in Dec and two next year, but likely with some dissenters along the way.

Chart 7: Is the ‘median dot’ that informative when the range of views is so large?



The dot plot reveals each FOMC member’s view on the path for rates. The dots are anonymous. There was no 2028 forecast in June.
Sources: Investec Economics, Federal Reserve

This is not an easy call however and will very much depend on the economic data. Another weak employment report could easily tilt the balance towards a cut in both Oct and Dec. This is particularly so if the inflation data continue to show only minor signs of tariff induced price pressures. A lag between tariffs being imposed and higher consumer prices is to be expected. Some retailers built up inventories before the tariffs kicked in, while for others there is time involved in passing higher costs onto the consumer. The latest PPI data suggest that retailers are swallowing some of the added cost (Chart 8). We do not expect the consumer to be completely shielded from price rises though and expect to see more evidence in the hard data by year-end.

Chart 8: Signs of margin compression in August’s PPI trade services data



Source: Investec Economics, Macrobond, BLS

Our profile for US rates described (75bps worth of cuts by end-26) is predicated on the assumption that the Fed continues to decide policy free from political pressure. The risk of political interference has grown, however, leading us to think about an interest rate profile under a Trump-influenced Fed. Newly appointed Governor Miran has helped us out with that, providing a blueprint of where rates could head if the President gets more of a say (Chart 9). We would note though that this path is likely to generate higher inflation over the medium term. At one point the Fed, independent or not, will have to act on this. Mr Trump might be more open to higher interest rates if elevated inflation starts to weigh on his popularity.

Chart 9: Could President Trump’s assault on the Fed mean rates settle lower than otherwise?



We assume that the bottom dots for Sep in Chart 7 belong to Miran
Source: Investec Economics, Federal Reserve

Indeed, the string of elections over the past few years have shown that incumbents do not fare so well when voting occurs during periods of high inflation. When it comes to the midterms however, Pres. Trump is making things easier for himself through a redistricting push, which aims to split the Democrat vote and deliver the Republicans more House seats. Democrats are responding in kind, but the GOP is expected to net more seats through this process. The President is also likely to try and win votes by selling the fact that his tariff policy has boosted government revenue (Chart 10). Indeed, fiscal year-to-date tariff revenues are more than 130% higher than the previous year.

Chart 10: Tariff revenues begin to top up Uncle Sam’s wallet (cumulative in each FY) …



Source: Investec Economics, Macrobond, US Treasury

Such tariff revenues have helped bring the deficit more into line with last year’s (Chart 11). Looking further ahead, the CBO estimated (as per 19 Aug) that the tariff changes will reduce the primary deficit by $3.3trn by 2035, if the tariffs are sustained over the horizon – a big if given that there will be two Presidential elections by 2035. In this scenario, this could offset the extra spend from the OBBBA, which the CBO predicted will add $3.4trn to the primary deficit by 2035. From Mr Trump’s policies as a whole, the CBO expects real GDP to be just 0.1% higher in 2028, relative to its Jan forecasts. A more immediate fiscal question however is the FY25/26 Budget. With time ticking, Congress is debating a short-term CR* to prevent a government shutdown at the end of September.

Chart 11: …helping the US federal deficit move more into line with last year



*CR is a continuing resolution, which provides funding for federal government agencies and programmes for a set period of time.
Source: Investec Economics, Macrobond, US Treasury

Although for now markets appear to have shrugged off US fiscal and tariff concerns, with the initial selling of US equities post 'Liberation Day' more than reversed, we are seeing some evidence of investors moving their purchases away from the US. According to the BIS, sovereign bond flows into the Euro area and other advanced economies exceeded those of the US. Although the depth of US markets prevents a material shift away from American assets, this points to some investor nerves over the US. This is reflected in our USD forecasts, which see a steady depreciation in the dollar, whilst we also expect 10y UST yields to rise slightly from current levels to 4.25% by end-26.

Chart 12: There are some tentative signs of investor diversification away from the US



Chart shows cumulative fund flows into government bonds
Source: BIS Quarterly Review, EPFR, Investec Economics

Eurozone

Confounding concerns over the potential negative impact on EU20 GDP from higher US tariffs, the reality so far at least has been limited to distortions to the pattern of growth. The underlying picture in fact provides some evidence of resilience. For example, by stripping out the most volatile element of H1 growth, swings in Ireland, and examining domestic final sales* shows that momentum was maintained at a pace of 0.2% q/q in each quarter. Higher frequency data, including the monthly PMIs, point to activity holding up in Q3, the composite index averaging 51.0 vs Q2’s 50.4. We forecast Q3 GDP expanding by 0.2% q/q, whilst our annual estimates stand at 1.4% for 2025 and 1.4% in 2026.

Chart 13: A distorted 2025 H1, but underlying momentum in EU20 GDP has been resilient



* GDP excluding inventories and net trade
Source: Eurostat, Macrobond and Investec Economics

These forecasts incorporate assumptions for European defence spending and investment. But there remains a degree of uncertainty over spending levels and over the uplift to growth, particularly given the risk that fiscal limitations put a brake on defence spending despite the EU’s Readiness 2030 plan. That said, recent Russian incursions into NATO air space are likely to have refocused European minds on the need to boost capabilities. With regards to the macro impact, the ECB has provided a ballpark estimate of a 0.1%pt uplift to its GDP base case in 2026 and 2027. But given the uncertainties it does also suggest that the uplift to growth may be as high as 0.4%pts in 2026 and 0.6%pts in 2027 in certain scenarios.

Chart 14: ECB estimates of the potential impact on growth from defence spending



* spending %pts of GDP, growth %pt deviations from baseline
Source: ECB

In contrast to other major central banks the ECB is in a relatively comfortable position. Inflation in the Euro area has returned to target, inflation expectations are anchored, and the economy has proven more resilient than had previously been expected. As such, with the current level of the Deposit rate around where we would estimate neutral to be, the ECB has the luxury of sitting tight. But the door to further easing is not shut entirely. A downside shock such as a surge in the euro pushing down on inflation could cause the Governing Council to react, but fine-tuning policy for small deviations from the inflation target seems to be off the table for now. We therefore continue to see the Deposit rate at 2.00% for the remainder of this year and next, barring an economic shock.

Chart 15: How much of an inflation undershoot is the ECB willing to tolerate?



Source: ECB, Macrobond, Investec Economics

Notably President Lagarde faced as many questions on France as she did on inflation during this month’s press conference. The message from the ECB was that bond markets were orderly and there was absolutely no discussion of TPI*. Indeed, whilst French 10y OAT yields have surpassed those of Greece and now Italy there are no echoes of the dislocations seen during the Euro debt crisis: French 30y OATs have outperformed equivalent German Bunds this year, whilst auction demand has also been robust, despite Fitch downgrading France’s rating to A+ from AA- this month. 

Chart 16: Role reversal: Southern European credit ratings^# improve as northern ones deteriorate



* Transmission Protection Instrument, # average rating of S&P, Fitch and Moody’s
Source: Macrobond and Investec Economics

A notable point of the European fiscal landscape is a reversal of fortunes for those Southern European countries that endured years of fiscal discipline, as evident in the trend of improving credit ratings relative to the deteriorating ratings of some of their northern neighbours. Even Italy has seen some improvement, with noise from Rome this month suggesting that its 2025 deficit could come in below the EU’s 3% limit, a fact reflected in Fitch’s upgrade to BBB+ this month. As for France, new PM Lecornu still faces the daunting task of putting France’s public finances on track. This is made harder by his minority government requiring the support of the Socialists, who want to halve the proposed fiscal tightening to c.€22bn. An extra challenge is that the European Commission will need to sign off its plans too given France is under Excessive Deficit Procedures (EDP).

Chart 17:  Fiscal deficits as % GDP (dashed lines represent countries under EDP)



Source: Macrobond, European Commission and Investec Economics

Year-to-date the euro is up 14% versus the US dollar, a performance amongst the G10 only surpassed by the Nordic currencies, NOK and SEK, as well as the Swiss franc. We believe there is room for further euro gains with our end-year forecast remaining at $1.20. Our end-2026 estimate is also unchanged at $1.25. Several factors sit behind this view, persistent USD weakness being one given some evidence of international reserve diversification into the euro markets (Chart 12). At the same time we do not envisage domestic issues such as France’s budget troubles undermining the single currency, given that it does not represent an existential threat to the Euro..

Chart 18: G10 currency performance versus the USD (year to date % change)



Source: Macrobond and Investec Economics

United Kingdom

GDP has lost its impressive momentum in H1 this year, when it grew by 0.7% q/q in Q1 and 0.3% in Q2. July’s data show that growth was zero on the month in July, albeit partly due to a strike by resident doctors. Also Sep’s ‘flash’ composite PMI fell by 2½ points to 51.0 after a number of upside surprises. We were already expecting a weaker H2 – note that GDP growth has been slower in H2 than H1 in each of the past four years, suggesting some residual seasonality in the data. Even so we have trimmed our 2025 forecast to +1.4% from +1.5% and to +1.5% for 2026 from 1.6%. But note that ‘Blue Book’ revisions are due shortly (30 Sep) which could alter recent history and also prompt forecast revisions.

Chart 19: GDP has lost some momentum recently, but the outlook remains benign



Source: ONS, Macrobond, Investec Economics

CPI inflation held steady at 3.8% in Aug, despite a reversal of July’s spike in airfares slicing 0.17%pts from the overall rate. A rise seems likely in Sep, largely to a weak outturn a year ago and we are pencilling in 3.9% (the BoE has 4.0%). This should prove the top of the inflation ‘hump’ and the key question is the speed and extent of the subsequent decline. The imposition of VAT on private school fees will ‘fall out’ in Jan, as will the jump in water charges three months later. Food price inflation, 4.8% in August, should also ease before end-year. Longer-term a continued loosening in labour market conditions and a related drop in pay growth should put continued downward pressure on services costs and our baseline view sees overall inflation returning to the 2.0% target in 2027.

Chart 20: Education, water and food – significant additions to overall inflation



Source: ONS, Macrobond, Investec Economics

Sep’s MPC’s Bank rate decision was less contentious than in Aug, when two votes were necessary to reach a decision (a 25bp cut to 4.0%). Instead 7 members voted to keep rates on hold, while 2 dissenters preferred another 25bp easing. Most feel uneasy with the high prevailing rate of inflation and require a degree of comfort with signs of inflation falling back towards the 2.0% target. We still judge that rates will end this year at 4.0% and that the MPC will resume policy easing in Feb. By contrast the short-term yield curve is not fully pricing in the next rate reduction until two meetings later (May’s announcement is actually scheduled to take place on 30 Apr). Our base case for end-2026 remains 3.25%.

Chart 21: The short-term yield curve does not fully price in the next cut until April - we disagree



Source: Bank of England, Macrobond, Investec Economics

The MPC also decided on the pace of gilt sales (Quantitative Tightening, or QT) from its Asset Purchase Facility (APF). By a 7-2 vote the committee decided to slow QT to £70bn between Oct and Sep next year from £100bn. Due to fewer APF maturities over the coming year than last (£49bn vs £87bn), active sales are set to rise to £21bn from £13bn. However to relieve pressure on the longer end of the gilt market, the expected maturity split will be weighted more towards short and medium sales. This could be flexible should market conditions dictate. APF gilt holdings, at £558bn, remain sizable. They are well down from the peak of £875bn, but are set to remain above pre-Covid levels of £435bn over the next 12 months (Chart 22).

Chart 22: The BoE will still hold more gilts over the next 12 months than in the pre-Covid period



Source: Bank of England, Macrobond, Investec Economics

The govt has flown a number of ‘kites’ ahead of the 26 Nov Budget, including scrapping Stamp Duty Land Tax in favour of a sales levy, an idea greeted less than enthusiastically by housebuilders. The key issue is the extent to which the Chancellor needs to make budgetary savings in order to meet her fiscal rules. In March the OBR concluded she had £9.9bn of headroom on her ‘stability rule’. But tightening measures seem unavoidable given welfare U-turns and that borrowing is running ahead of OBR forecasts between Apr and Aug. The key risk is that the OBR downgrades its long-term productivity growth assumptions, currently 1.25% pa, closer to the post GFC average of 0.5%, hitting growth and tax revenue forecasts, resulting in the need for a material fiscal tightening.

Chart 23: ‘Current’ borrowing (used in the Stability Rule) is running above OBR forecasts



Source: OBR, Macrobond, Investec Economics

More widely, Keir Starmer has had a torrid month, with forced departures of Deputy PM Angela Rayner, US Ambassador Peter Mandelson and Paul Ovenden, a key aide. With the PM’s judgement in question, many are now of the view that a poor set of local elections next May could lead to his departure (if indeed he survives that long). Speculation is that former Health Secretary and current Mayor of Greater Manchester Andy Burnham could take over, with a potential by-election at Gorton and Denton paving his way back to the Commons. For now, sterling seems untroubled by Reform UK’s 8% or so lead in the polls and our end-2025 forecasts remain unchanged at $1.37 and 88p against the euro.

Chart 24: No respite for Labour in the polls or in the news



Source: Europe Elects, Macrobond, Investec Economics

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