Macro House View Q3 2025

Over the past quarter, we have seen two major changes to global macroeconomic policy: trade and tax policy. As Figure 1 shows, according to Yale’s Budget Lab, the U.S. average effective tariff rate was 18% at the time of this writing, substantially higher than the 2.5% rate at the start of the year. Why then have we not seen more impact on the economy? Tariffs actually impact a small share of economic activity—only 5% of global GDP excluding the U.S. It is also too soon to see a new steady state of global trade. Second quarter economic growth was boosted by companies bringing forward purchases to avoid impending tariffs.

Figure 1: U.S. average effective tariff rate, %

Turning to fiscal policy, the three major markets impacted are the U.S., the U.K. and Germany. Looking at the U.S. first, the extension of tax cuts in the One Big Beautiful Bill Act (OBBBA) could have a positive near-term impact on consumer spending for higher-income groups but this is likely to be offset by reduced purchasing power from lower-income groups that will see benefit cuts. The biggest impact of the OBBBA is really on the U.S. fiscal position. As shown in Figure 2, the federal deficit is estimated to increase by $3 trillion over the next decade according to the Congressional Budget Office. Near-term growth should be resilient, but the bond market will be watching the U.S. fiscal position closely.

Figure 2: Net fiscal impact over the next 10 years, assuming no change, $ billions

In the U.K., the fiscal position has deteriorated further from an already weak level, with additional public spending announced. This may be rectified by tax increases in the November budget, but a sense of persistent weakness pervades. By contrast, Germany remains (ex-Australia) one of the few developed markets that runs a relatively healthy public sector balance sheet. Since the Q2 2025 Macro House View, Germany has passed laws to expand public spending, with a particular focus on infrastructure and defense. This will increase their budget deficit but they have the fiscal headroom to support the action.

Equity markets have surprisingly fared well despite policy volatility. Figure 3 shows all major U.S. indices are back above the previous peak in late February. The two markets that are reflating their economies through fiscal expansion—Germany and China—have seen the strongest gains. Conversely, Figure 4 shows that the bond market remains hawkish. Nominal government bond yields in Australia, the U.K. and the U.S. remain in the mid-4% range, despite expectations of near-term policy rate cuts. Perhaps of even more significance, the Japanese bond yield continues to edge up.

Figure 3: Global equity benchmarks, index rebased to 100 on February 20, 2025

Figure 4: Global 10-year government bond yields, %

Almost every major market—ex-China and perhaps the Eurozone—has concerns that high inflation will persist and potentially increase given trade and tax policy shifts. Figure 5 shows that U.S. inflation-linked swaps are now pricing in inflation in the mid to high 2% range over the next three to 10 years.

Like the equity market, the real economy remains tempest tossed but afloat. Figure 6 shows that the real economy is expanding at a modest-to-rapid clip depending on the market. The S&P Global PMIs indicate whether reported business activity is expanding or contracting in a weighted average of the manufacturing and service sectors. In all cases, the lines are above 50, indicating an expansion, with Australia and the U.S. showing particularly strong readings. The question is whether this decent real economic performance can last.

Figure 5: U.S. inflation-linked swaps, %

Figure 6: S&P Global PMI, Major Markets Index, 50=no change

Given that much of the trade and tax policy shifts were already disclosed, we have made very few changes to our macro base case. We still expect adequate but not spectacular growth, sticky inflation and higher-for-longer interest rates. Figures 7 and 8 show our five-year forecasts for annual GDP growth and inflation with revisions from our April base case.

Figure 7: GDP, 2025-2029, % Y-o-Y

Figure 8: CPI inflation, 2025-2029, % Y-o-Y

Turning to long bond yields, there are few changes. We continue to expect U.S., Australian and U.K. bond yields to run in the mid-4% range, and have increased our U.S. and U.K. forecasts by 20 basis points to reflect increased fiscal profligacy. This forecast reflects a historically high premium for U.K. gilt yields over the German Bund yield, which seems appropriate given their respective fiscal positions. The other change is to the Japanese bond yield, which we now see as peaking at 2% rather than 1.75% (Figure 9). The change to the Japanese bond yield reflects stronger inflationary pressures, and while more hawkish than our prior forecasts, is less bearish than the forward curve, which is currently implying that JGB yields rise to around 2.5% over the next five years.

Figure 9: 10-year government bond yields, %

A base case macro forecast is only as good as the stability and visibility within the global economy. Given the policy changes we have already outlined, and the potential for exogenous shocks that always exist, we believe in being prudent and look at macro scenarios to inform the peripheral risks to our real assets underwriting. We need to analyze what could happen if our tempest-tossed economy does not float. In doing so, we found upside surprises that could materially improve the outlook.

Our best estimate is that the most probable upside risk comes from a successful and larger fiscal reflation of the German and Chinese economies, with spillover effects in the wider European and global economy, respectively. On the downside, the risk is that trade disputes escalate into a trade war. In the downside case, we assume that the effective tariff rate rises to 33% causing a more profound slowdown in U.S. growth and negative spillovers to the rest of the globe.

Figure 10 shows the impacts of the macro scenarios on our GDP growth forecasts. Unsurprisingly, growth is stronger in the upside and weaker in the downside, but with differing impact depending on the market. The greatest degree of change based on the scenarios occurs in highly export-driven markets such as Malaysia, China and South Korea. The downside scenario has a particularly negative impact on the U.S. given the impact on U.S. consumers from dramatically higher tariffs and reflected in labor market forecasts. The impact on inflation and interest rates varies, depending on how far each country’s policymakers use monetary and fiscal policy to offset the impact of higher tariffs, as well as the mix of trade in each market. In general, we see dramatically lower policy rates, but the impact on inflation and the long-run bond yield varies depending on each country’s fiscal position.

Overall, the upside and downside scenarios have more variation on the themes we discussed and reflected in our key calls. The U.S. scenario outcomes are heavily driven by trade and tax policy. Europe and China outcomes are driven by fiscal policy and reflation. The bond market reaction reflects a harsher reaction to fiscal profligacy.

Figure 10: GDP, 2025-2029, % Y-o-Y

Download the Macro House View Q3 2025.