Real Assets: Fundamentals
Macro House View Q2 2025
May 15, 2025
Introduction and Key Calls
Author
Global Research Director, Senior Economist – Insights & Intelligence
While the global economy entered 2025 in a reasonably sound condition, the near-term outlook has deteriorated due to a modern trade experiment with tariffs, a complex interplay of disruptive policy responses and evolving risk and return expectations.
The "Liberation Day" tariff announcements moved into a de-escalation phase after negative market reactions. With policy changes occurring at breakneck speed, we revert to scenario analyses—last used during the pandemic—to provide the most valuable information for our clients. The U.S. scenarios are detailed in this report and additional information is available upon request.
The real estate industry and the broader financial markets are increasingly experienced with persistent volatilities. Notwithstanding what will unfold in the coming weeks and months, we will continue to identify long-term trends and construct portfolios that transcend political cycles.
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Near-term stagflation risk in the U.S.
Tariffs and policy uncertainty lead to weaker GDP growth and higher inflation. Stagflation—a combination of high inflation, slow economic growth and high unemployment—leaves the U.S. Federal Reserve (Fed) cutting interest rates only twice in 2025 and 10-year bonds in the low 4% range.
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Germany and China boost domestic demand
German and Chinese expansionary policy and focus on domestic consumption will offset some of the tariff impacts. Germany’s reflation is expected to boost Eurozone growth and inflation.
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Sovereign borrowing costs remain elevated
The U.K. and France face higher-for-longer risk premiums over the Bund. Japanese bond yields rise as inflation remains elevated and the risk-free status of the U.S. is questioned.
Source: CBRE Investment Management.
A modern trade experiment with tariffs
Tariffs are taxes imposed on importers, and importers pass higher costs through to consumers.1 The trade-weighted effective tariff rate in the U.S. went from 2.4% in 2024 to nearly 15%, trending lower now with exemptions and reversals. The situation is highly fluid. In the base case, we expect the effective U.S. tariff rate to average approximately 14% for 2025 and decline toward 12% in the next four years. The base case assumes 10% universal tariffs with the exception of Canada, Mexico and China. Canada and Mexico are expected to renew the free trade agreement with the U.S. in 2026. China may face more than 30% tariffs for at least a couple of years.
Figure 1: U.S. effective tariff rate, %
The downside scenario considers the risk of slow trade negotiations and the return of reciprocal tariffs after the 90-day pause, while the upside scenario involves tariff reversals and rapid trade substitutions—reconfiguring supply chains from China to India, for example, and widespread exemptions for strategic imports.
In the base case, inflation is expected to accelerate notably in the U.S. and Japan. Reflation is an expansion in the level of output of an economy by government stimulus using either fiscal or monetary policy. Germany’s €500 billion fiscal reflation will lead to some inflation but also help stabilize the European economy against tariff impacts, and further tariff offsets are available through substitutions.
Figure 2: CPI Inflation, 2025-2029 average, % Y-o-Y
GDP growth forecasts for the U.S. and many trade economies are downgraded. With higher-for-longer inflation and tariff-induced supply shocks, the U.S. is at risk of stagflation. The headline labor market data has remained strong, but risks are heavily skewed to the downside with increasing layoff announcements.
Figure 3: GDP, 2025-2029 average, % Y-o-Y
China, Australia and the Eurozone are expected to be relatively resilient. Expansionary fiscal and monetary policies in China and Germany are boosting domestic demand and both are trading more intra-regionally. The German reflation reduces its exposure to global trade disruptions and will help support the Eurozone’s regional stability.
Australia entered the easing cycle in Q1 2025 and is on track to see three more cuts during the remainder of 2025. The country has a trade deficit with the U.S. and diversified trade relationships to weather the trade storm.
Most central banks are expected to cut policy rates to support growth amidst global trade disruptions, but inflation concerns put them in a stagflationary conundrum, especially for the Fed. Core CPI inflation, projected to rise toward 5.0% due to tariff impacts, has constrained the Fed’s ability to aggressively ease policy rates. We remain aligned with the Fed’s two-cut guidance for 2025.
The Bank of Japan hiked interest rates in January, driven by persistent above-target inflation and increased pressure to strengthen the Yen. We expect continued monetary policy normalization at a slow pace.
Figure 4: Central bank policy rates, %
Sovereign borrowing costs remain elevated
Our higher-for-longer bond yield forecasts have been on point. Most adjustments in our forecast occurred in the Eurozone where German fiscal reflation is projected to raise the Eurozone bond yields by 25 basis points (bps) on average. The U.K. and France face higher risk premiums over German Bunds, signaling sustained fiscal concerns and contributing to elevated borrowing costs.
Figure 5: 10-year government bond yields, 2025-2029, % average
Figure 6: 10-year government bond yields, %
Japan is another market that is expected to see potentially higher bond yields due to elevated sovereign risk premiums. The current forecast of 1.5% balances market expectations for Japan’s fiscal constraints and strong domestic demand for Japanese bonds in the long run.
The table below summarizes revised forecasts for six major economies and reflects our baseline view of tariff impacts:
| Region | GDP growth | Inflation | Policy rate | 10-year bond yield |
| U.S. | Downgraded | Higher for longer | Two cuts in H2 2025 | Volatile in the low-to-mid 4% range |
| Eurozone | Steady with German support | German reflation offsets tariff impact | Two cuts remaining in 2025 | 25 bps higher for longer |
| U.K. | Slightly weaker | Slightly higher | Two cuts remaining in 2025 | Fiscal premium persists |
| Japan | Slow recovery | Above target | Gradual hikes to 1.0% by 2027 | Move around 1.5% |
| Australia | Relatively resilient | Moderating | Three cuts remaining in 2025 | Flattening yield curve |
| China | Stimulus-driven | Tariff may help inflation reach target | Easing bias | Low and stable |
Slowdown or recession?
Just three months ago, the U.S. economy was exceptionally strong and we expected deregulation would boost supply and lead to another round of supercharged growth. A new reality hit hard and fast. Q1 GDP contracted by 0.3%,2 largely driven by inventory stockpiling. Consumption growth weakened despite a stable job market.
Figure 7: U.S. GDP breakdown
With huge uncertainties in tariff policies and various consequences, we produced upside and downside scenarios to suggest a range of outcomes for the global economy. We allocate 55% probability to the base case, 30% to the downside and 15% to the upside.
In this report we will focus on the U.S. scenarios. Recall the tariff assumptions in Figure 1. In the base case, we expect consumers to pull forward purchases in Q2 2025, to be followed by a steep spending cutback in the second half of the year, contributing to a slow year yet no recession.
Figure 8: U.S. GDP growth scenarios, % Y-o-Y
In the downside scenario, where we assume slow progress on trade agreements and further tariff escalations, we expect the economy to fall into a recession in Q2 2025 and GDP growth to stay negative throughout 2025. The scenario considers sharp inflation, immediate fall-off of consumer demand and mass layoffs. We expect the Fed to cut interest rates to 2.25%-2.50% in this scenario, reluctantly accepting higher inflation due to harsh economic conditions. However, the 10-year Treasury yield is expected to move out with heightened risk premiums and approach 5% in the long term. In this bleak scenario, all investment returns will be challenged and investors will need to endure more asset value correction before policy disruptions dissipate.
In the upside scenario, where we assume more than half of the tariffs will be reversed or offset, consumption will stay resilient based on the wealth effect, and long-term trends such as diversified supply chains and onshoring will accelerate. This is a very positive scenario for the U.S. economy. Inflation will stabilize at 2% with a slightly higher policy rate and bond yields will compress another 20 bps in the five-year average.
Figure 9: U.S. CPI inflation scenarios, % Y-o-Y
Figure 10: U.S. 10-year treasury yield scenarios, %
Conclusion
It is easy to see the glass half empty with all the volatilities in sight, but the global landscape is evolving in multiple directions, not just one. Germany is beginning a period of pro-growth movement. China is narrowing in on a tech-driven economic transformation. The centripetal force in Europe has possibly never been stronger as the bloc recalibrates strategies to gain competitiveness. Globally, the outlook is as much half full as half empty. While short-term volatility is likely to persist, economic policy shifts can stimulate the emergence of new world leaders in innovation and sustainability. Maintaining a long-term perspective and a disciplined approach remains essential for navigating uncertainty and capitalizing on future growth.