Economic growth outlook moderates as major risks loom

A lot has happened since the start of the year. Now that the dust is starting to settle, it's time to take stock of how the past six months have impacted global macro forces and market perspectives. Encompassing the trade tariffs imposed by the White House, Trump’s ‘Big Beautiful Bill’, geopolitical risks flaring in the Middle East and markets’ V-shaped recovery, the first half of 2025 could be described as turbulent, but even that would be an understatement. 

At the end of last year, our 2025 scenario described a simple nominal recovery. We expected inflation to remain stubbornly above 2%, while growth outside of the US was expected to show signs of improvement. Now, we must consider the key factors likely to influence the second half of the year, which we are characterising as a period of resilient growth. This more muted take on growth has implications for financial markets and portfolios, and comes with a cohort of risks.

Read more: In a year of divergence, three shifts in 2025 should favour active managers

Our base case: resilient growth

With one of our primary risks for 2025 – a trade war – quickly materialising, the subsequent macroeconomic uncertainty affected both service and manufacturing activities, and more crucially, future outlooks. These deteriorating prospects are increasingly evident in the growth signals from our nowcasters, as shown in Figure 1, alongside International Monetary Fund (IMF) economists' revised growth estimates for 2025 compared to 2024. Yet, the magnitude of this deceleration remains relatively modest, and we continue to view current growth conditions as resilient. 

FIG 1. Proprietary LOIM growth nowcasting signals across economic zones and IMF growth forecasts¹

The inflation scenario has also evolved significantly. Economists' initial reaction to the trade war was to contemplate a substantial inflation impact in the US. At the end of Q2, however, this anticipated effect is nowhere to be found. This situation aligns with our historical analysis: when tariffs rise by more than 3%, the negative impact on demand typically dominates the positive impact on inflation. Inflation has globally returned to expected bounds across countries, and represents broadly positive news. The normalisation of inflation has granted a breather for central banks. While dovish monetary policy prevails, hesitation is emerging due to the uncertainty currently stemming from geopolitical risks.

This environment creates opportunities for diversified investment strategies, particularly those extending beyond traditional developed market (DM) allocations.

Risk scenario: hard landing

Yet, we also anticipate three factors that could lower our growth forecast to levels more consistent with a hard landing. 

1. The debt issue is an obvious concern, as most efforts to control public finances have been abandoned. We distinguish between debt growth used to enhance potential economic expansion and debt which simply results from the inadequate control over public spending
2. The impact of tariffs on growth should begin to materialise during Q3 and Q4. This phase remains uncertain, yet the consensus currently appears to dismiss any potential impact 
3. Valuations were already elevated at the start of the year, underwent reshuffling amid trade war concerns and delays, but have now returned to high levels once more. 

The convergence of these three risk factors collectively points toward a macroeconomic scenario with significant market implications: the potential for a hard landing. Should this scenario materialise, the performance profile across asset classes would diverge substantially from our baseline expectations of resilient growth. Our return forecasts would require substantial recalibration, with particularly negative implications for cyclical assets such as equities and commodities. Conversely, fixed income instruments, including convertible bonds, would likely benefit broadly from this environment, with advantages accruing disproportionately to higher-quality issues. 

Read more: Convertible bonds for the ups and downs of uncertainty

Markets may rebalance in favour of bonds in H2

As we reflect on the first half of 2025, it becomes evident that the global economic landscape has experienced a substantial transformation. Our initial nominal recovery scenario has evolved into what we now characterise as resilient growth. However, we must remain vigilant regarding the three significant risk factors that could precipitate a hard landing. These concerns have already manifested in tangible market volatility throughout the first half of the year. The escalation of any one of these factors could substantially alter our base case scenario, potentially triggering significant market corrections. 

Figure 2 provides a comparative analysis of year-to-date performance against projected returns, which reveals an interesting divergence: while equity markets have outperformed our expectations, fixed income assets have lagged considerably. This imbalance suggests that markets may have priced in much of the positive growth narrative while underweighting the potential benefits of diversification through quality fixed income exposure. 

FIG 2. Evolution of expected returns in comparison to nominal recovery scenario²  

 
As we progress through the second half of 2025, we anticipate a rebalancing of this dynamic, with bonds potentially offering both essential portfolio protection and attractive relative returns. After all, inflation is controlled, and not all government debt is set on an unsustainable path – bonds could offer a better contribution to portfolio performance by year-end.