The geopolitical and economic landscape for 2025-2026 is fraught with challenges, as highlighted by a recent scenario analysis. A significant development occurred on June 13 when Israel launched an attack on Iran, marking a critical escalation in regional tensions. This incident adds to the existing risks that are both cyclical and structural in nature.
The United States began the year with a focus on its perceived exceptionalism, characterized by strong growth potential despite rising interest rates and a robust USD. However, this outlook was shaken following President Donald Trump's "Liberation Day" tariff announcements. Trump later paused these tariffs for 90 days and reduced them to 10%, raising doubts about his ability to fulfill commitments both domestically and internationally.
Forecasts for the US have been slightly downgraded, with growth expected to slow significantly in 2025 before recovering in 2026. The decline is attributed primarily to new trade policies, while factors like tax cuts and deregulation are anticipated to boost growth later. Inflation forecasts have been revised upwards due to tariffs, which could increase annual inflation rates temporarily.
In Europe, domestic demand is seen as a buffer against global economic slowdowns. Two scenarios are considered: one of resilience driven by increased public spending on defense and infrastructure, and another of stagnation due to competitiveness shocks and private sector uncertainty. The preferred scenario suggests modest growth acceleration in the Eurozone through stronger domestic demand.
For emerging economies, despite global uncertainties and tariffs affecting each differently, there remains cautious optimism about their resilience supported by solid labor markets and monetary easing measures.
Monetary policy approaches reflect current uncertainties; the Federal Reserve is expected to cut rates twice in 2025 before holding steady through 2026 amid fluctuating inflation expectations. Meanwhile, the European Central Bank may have reached its limit on rate cuts unless further economic deterioration occurs.
Interest rates face pressure from various factors including persistent inflation risks and fiscal sustainability concerns in the US. Treasury yields are projected to rise moderately over the next two years alongside Eurozone bond yields amid stabilizing sovereign spreads.
Lastly, while pressures mount against it due to unpredictable policies under Trump’s administration among other factors—the USD continues maintaining its status albeit under scrutiny concerning its reserve currency role moving forward.