World – Macro-economic scenario 2025-2026: a nerve-wracking context, some unprecedented resistance

There were already many risks, both economic and geopolitical, influencing our scenario, both in terms of cyclical inflections and structural aspects. Compounding these risks, Israel’s attack on Iran on 13 June constitutes an unprecedented escalation in terms of its scale and its severity. This act marks a strategic turning point for the region.

Our scenario, already rocked by recently fickle, unpredictable US economy policy, comes against an an increasingly uncertain backdrop where disruptive events (eg, blockage of the Strait of Hormuz, incidents on Gulf infrastructures) cannot be completely ruled out.

For the US, the year began with the refrain of US exceptionalism (above-potential growth, resilience despite interest rates set to rise, the USD’s privileged status, unlimited capacity to take on debt and pass on risks to the rest of the world), but markets soon became disenchanted with US assets following the “Liberation Day” tariff announcements. President Donald Trump soon backpedalled, announcing a 90-day pause on the tariffs and a reduction in the so-called “reciprocal tariffs” to 10%, casting serious doubts as to Trump’s ability to truly honour his domestic and international commitments. Sentiment has swung wildly between two extremes, negative and positive.

Although our forecasts for 2025 have been revised downwards slightly, our US scenario has remained on course, in line with the timing of the economic policy measures: while avoiding recession, growth is expected to fall back sharply in 2025, with inflation picking up, before recovering in 2026. Even with the recent de-escalation, tariffs remain significantly higher than they were before Trump was elected to his second term. The negative impact of the new trade policy is the main driver of the decline in growth expected in 2025 (1.5% after 2.8% in 2024), while the more growth-favourable aspects (One Big Beautiful Bill, tax cuts deregulation) are expected to contribute to a rebound in growth in 2026 (2.2%). The hypothesis of a recession in 2025 has been ruled out on the grounds of solid fundamentals, including reduced sensitivity to interest rates, solid household finances and a labour market that remains relatively robust, albeit showing signs of deterioration.

Despite the expected slowdown in growth, our inflation forecasts have been revised upwards. The tariffs are expected to increase YoY inflation by around 80bp at the point of maximum impact. Although this effect is temporary, inflation (as an annual average) would reach 2.9% in 2025 and 2.7% in 2026. It would therefore continue to exceed 2%, with underlying inflation stabilising at around 2.5% by the end of 2026.

Against an unpredictable backdrop marked by conflict, Europe’s salvation would lie in its domestic demand, which would make it stronger in the face of a global slowdown. We see two potential alternative scenarios, with a delicate balance between them: (1) a resilient Eurozone economy bolstered by an increase in private sector spending and above all in public spending on defence & infrastructure; and (2) a scenario of stagnation in activity due to a combination of negative shocks: competitiveness shocks linked to higher tariffs, an appreciation of the EUR and the negative impact of uncertainty on private sector confidence. We favour the resilience scenario, based on a resilient labour market, a healthy economic & financial situation for the private sector and a favourable impetus from the credit cycle. The actual implementation of additional public spending, particularly the “German bazooka”, certainly needs to be confirmed. But this spending could offer the Eurozone growth driven by stronger domestic demand at a time when global growth is weakening. It would offer a kind of exceptionalism, particularly in light of the past decade, which would set Eurozone growth above potential in the medium term. Average annual growth in the Eurozone should accelerate slightly to 0.9% in 2025 and strengthen to 1.3% in 2026. Average inflation should continue to ease, reaching 2.1% and 1.8% in 2025 and 2026 respectively.

This scenario assumes a status quo in the tariff confrontation with the US on 4 June, ie, an across-the-board increase in tariffs to 10%, with the exception of exempted products, 25% on automobiles and 50% on steel. The risks associated with this central scenario are bearish. The stagnation scenario could materialise if the trade confrontation with the US were to intensify, if the competitiveness constraints were to bite further, if private sector confidence were to deteriorate significantly and, finally, if the fiscal stimulus were to be implemented more gradually than anticipated.

In the not-too-distant past, such an uncertain environment, with a global slowdown and shrinking export markets, would certainly have led to an ‘underperformance’ by emerging economies, which were also handicapped by market aversion to risk, rising interest rates and pressure on their currencies. However, despite tariffs (the effects of which will vary greatly from one economy to another), our overall scenario remains rather optimistic for the major emerging countries. They could show unprecedented resilience, thanks to support that could partially cushion the impact of a lacklustre environment: relatively strong labour markets, solid domestic demand, monetary easing (with rare exceptions) and limited Chinese deceleration. Finally, emerging currencies have held up well, and the risk of defensive rate hikes penalising growth is lower than might have been feared. This relatively positive outlook is, however, accompanied by higher-than-usual secondary risks, due to the unpredictability of US policies.

In terms of monetary policy, the end of the easing cycles is approaching. In the US, The Fed is firmly in “wait and see” mode, faced with a scenario of a clear downturn in 2025, a rebound in 2026 and rising inflation that would continue to significantly exceed its target – as well as the degree of uncertainty surrounding this scenario. But in our view, it will still proceed with modest easing followed by a long pause. Our scenario still calls for two cuts in 2025, but shifts them by one quarter (in September and December, vs June and September previously). After these two cuts, we expect the Fed to keep rates unchanged at a maximum upper limit of 4% throughout 2026. As for the ECB, although it refuses to rule out any future rate cuts, it may well have reached the end of its rate-cutting cycle, with growth expected to pick up and inflation on target. Of course, a deterioration in the economic environment would justify further easing: the ECB stands ready to cut rates if necessary.

On the interest rate front, US interest rates are feeling pressure from (1) the risk of stubborn inflation and a fiscal path deemed unsustainable; (2) a compromised AAA rating; (3) fickle economic decisions; and (4) heightened investor concerns. Our scenario assumes a 10Y Treasury rate close to 4.70% at end-2025 and 4.95% at end-2026. In the Eurozone, with growth resilient and projected to accelerate, inflation on target and the ECB expected to have almost completed its easing, interest rates are likely to rise slightly and sovereign spreads to stabilise or even tighten. The 10Y Bund rate could thus approach 2.90% at end-2025 and 2.95% at end-2026. Over the same maturity, France’s spread relative to the Bund would hover around 60-65bp, while Italy’s would narrow to 90bp by the end of 2026.

Lastly, the USD is continuing to lose some of its lustre. It has been under pressure from (1) Donald Trump’s volatile, unpredictable economic (and other) policies; (2) the deteriorated US budget outlook; (3) speculation about any official intentions to depreciate the currency; and (4) resistance from other economies. However, we continue to think it is too early to call the demise of the USD’s reserve currency status. We expect EUR/USD to reach 1.14 in Q425, before falling to 1.10 in 2026.