SSGA — Market Forecasts Q2 25

• Sentiment toward the global economy is less positive than in December, reflecting the impact of US tariff announcements.

risks to growth have increased. • The European Union, and Germany in particular, are stepping up fiscal measures to address infrastructure and defense concerns — a long overdue development that may offset tariff worries and bolster consumer and business sentiment. • Global monetary easing will continue through the remainder of 2025. Inflation above central bank targets is unlikely to deter major banks from lowering rates in the coming months, with Japan remaining the exception with rates likely to be increased there. • Principles and process over point estimates — specific numerical forecasts may be less effective in an environment characterized by dramatic changes in the policy landscape. • Risk reduction is most sensible for the time being and we’ve taken down absolute risk (by moving to a modest equity underweight) as well as relative risk (by reducing the size of many of our active positions).

Street Global Advisors, as of March 21, 2025. The above forecast is an estimate based on certain assumptions and analysis made by the State Street Global Advisors Economics Team. There is no guarantee that the estimates will be achieved.

April 10, 2025.

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that has cast a shadow of uncertainty over economic projections. However, while there are now more downside risks than three months ago, we are still not forecasting a recession. If there was ever a time when we shouldn’t rely too heavily on forecasts, it is now. If you were to simply look at our global growth forecast chart (Figure 1), you could easily conclude that all is right with the global economy. You would be wrong. Admittedly, steady growth near trend is not a bad outcome. But what that chart doesn’t tell you is that there is considerable turmoil brewing that has the potential to disrupt this appearance of calm in the months ahead. We’ve already had a flavor of that in the first weeks of April. So why not reflect those risks more visibly in the numbers? There are three reasons. In the first instance, three months on since our December update, we still grapple with considerable uncertainty around the “what”, the “when”, the “how”, and the “how long” of incoming US policy changes. This is why, when it came to tariffs, our approach was top down and in a sense stylistic, rather than bottom up and subject to wild, never-ending, revisions. Our tariff assumptions, for instance, broadly hold even after events so far. Secondly, because even as some risks grow (i.e., trade), progress elsewhere (deregulation in US, stimulus in China), offer some partial offsets. And third, the German debt brake deal is a genuinely positive development whose beneficial impact will be felt over time. This is why, even as we trimmed US, Canadian, and UK growth, the 2025 eurozone forecast is unchanged. We see the potential for meaningful further improvement in 2026. Clearly, there is a risk of escalating trade tensions, with the on/off nature of US tariffs in early April and the sharp market reactions providing some indication of that, but the big shift in German policymaking is to us the equally important macro story of the past quarter. It speaks to a narrowing of the US growth outperformance, which had been previously anticipated in 2024 but failed to materialize. Now, there is a powerful fundamental catalyst behind that expectation in 2025. It is too soon to give up on the US exceptionalism story, but it may be time to believe in Europe once again. Central bank expectations are unchanged. We expect another hike from the Bank of Japan (BoJ), and 75 basis points (bps) worth of cuts from US Federal Reserve (Fed), 100 bps from the European Central Bank (ECB), and 125 bps from the Bank of England (BoE) for the year as a whole.

important. Perceptions about the health of the US economy have swung dramatically since our last update. After a string of data disappointments and a recent dramatic decline in consumer sentiment, the sense of euphoria that permeated the end of Q4 has vanished.

questioning of whether the US economy is somehow broken. Neither is true. So where do we stand? In many ways, it can be argued that we are not that far from where we stood in December. The US economy ended 2024 on a strong footing — unsustainably strong, in fact. The economy grew 2.8%, barely changed from 2.9% in 2023, with consumer spending growth accelerating slightly and contributing the lion’s share of the overall performance. Private fixed investment growth also picked up on account of residential construction which finally emerged from two years of deep contractions. Elsewhere, equipment investment grew at a steady pace, IP investment growth slowed modestly, and non-residential structures investment slowed sharply (but from a higher base). Trade was a persistent drag. There has been a lot of ‘noise’ through the first months of 2025, but it is important to cut through that barrage of sound. The Trump administration followed through with increased tariffs on countries and sectors and announced reciprocal tariffs on trading partners on April 2 — or Liberation Day as President Trump termed it. This is a fast-moving environment and the US shortly thereafter announced a 90-day pause and scaled back those tariffs to a 10% rate, with the exception of Canada and Mexico where announced tariffs were raised further on China (though with some exemptions), which engaged in a tit-for-tat ramping up of tariffs. We expect growth may slow to 1.8% in 2025, a four-tenths downgrade relative to our December forecast. Much of this comes from a notable slowdown in household consumption. What causes this? It is a combination of hard data (i.e., number of people, income) and soft data (sentiment).

and we may yet be again, but factors weighing on consumption appear to be multiplying. First, immigration is undergoing an abrupt shift. We do not have a clear sense of how many deportations will actually take place this year (likely much fewer than people expect), but the data already show a dramatic reduction in new arrivals into the country. Even assuming steady per capita spending, this means slower growth in aggregate household consumption. Secondly, as excess savings wane, consumption starts to more closely align with income growth, specifically labor income. Labor income growth should moderate in line with slower payrolls expansion, which is why, despite the obsessive focus on tariffs, we believe the labor market and the unemployment rate are the most important statistics of 2025. We see the unemployment rate hitting 4.7% in Q4.