Morgan Stanley Mid-Year Global Economic Outlook 2025: Avoiding Recession, Ending Exceptionalism

According to the Zhitong Finance APP, on June 25, JP Morgan released its 2025 Mid-Term Global Economic Outlook report titled "Avoiding Recession, Ending Exceptionalism," which indicates that the performance in the first half of 2025 aligns with JP Morgan's expectations for growth resilience and inflation persistence. However, this year's policy surprises have altered the bank's view on the future path. JP Morgan is confident in the forecast for the second half of 2025, but the degree of stagflation tendencies is difficult to measure. There is a high level of uncertainty regarding the transmission of unprecedented trade shocks. More surprises may also arise in the political/policy arena. Notably, JP Morgan expects U.S. tariff rates to rise further.

Core predictions are as follows:

The trade war will drive stagflation tendencies in the second half of 2025. Global GDP growth is expected to slow to an annualized rate of 1.4%. Core inflation is projected to rise to an annualized rate of 3.4%, primarily due to inflation surges related to U.S. tariffs.

The commodity production sector will be the first to feel the impact of the economic slowdown due to early loading in the first half of the year. Global factory output and capital expenditure will contract.

Despite soaring U.S. inflation, lower-than-expected growth will drive moderate deflation in other regions. The core inflation rate in the Eurozone is expected to fall below an annualized rate of 2%.

The significant decline in China's exports to the U.S. has largely been offset by exports to other regions. However, China is slowing its policy support for domestic demand, which will lead to a global growth slowdown.

Despite varying inflation trends, JP Morgan expects central banks around the world to generally ease policies. The Federal Reserve has signaled caution but is expected to respond to early signs of weakness in the labor market. Easing core inflation and slowing growth will pave the way for further interest rate cuts in other regions.

JP Morgan is confident in the forecast for the second half of 2025, but the degree of stagflation tendencies is difficult to measure. There is a high level of uncertainty regarding the transmission of unprecedented trade shocks. More surprises may also arise in the political/policy arena. Notably, JP Morgan expects U.S. tariff rates to rise further.

JP Morgan assesses that the global GDP growth deviates from the moderate upside risk in the forecast for the second half of 2025. This bias stems from JP Morgan's positive assessment of the health of the private sector, a still supportive financial environment, and the buffering effects of increased energy supply and expectations of fiscal policy easing.

The risk of significant growth surprises is tilted to the downside, JP Morgan believes the probability of the U.S. falling into recession is as high as 40%.

The high risk of recession in the U.S. is accompanied by concerns that the impending squeeze on household purchasing power will interact with the sluggish sentiment in the corporate sector, prompting businesses to cut spending.

Behavioral buffers from the still-healthy corporate sector—avoiding layoffs—are key to maintaining U.S. economic expansion. The cost of this buffer will be a compression of profit margins.

The growth outlook for the U.S. will weaken due to this compression, along with sluggish immigration flows and the macroeconomic backdrop of high inflation and persistent large budget deficits—which will drive interest rates higher