Our investment and economic outlook, April 2025

Changes related to our model enhancements include:

• Increases in expected returns for U.S. stocks, which were driven by a reduction in the extent of valuation contraction we forecast based on forward-looking fair-value estimates.
  
  
• A depreciating U.S. dollar relative to most major currencies, including the euro and the yen, though we expect less strengthening in these other currencies than we did before.
  
  
• Lower forecasted returns from unhedged foreign equity investments, because of the combination of the above factors.

Among our forecast changes related to market movements in the first quarter, domestic equities in local currency terms were boosted by material valuation contractions in the U.S., Japan, Canada, and Australia.

A fuller discussion of our methodology enhancements, as well as our forecasts of annualized asset class returns and volatility levels over 10-year and 30-year horizons, is available on our economics and markets hub.

The anticipated impact of tariffs and related policy uncertainty led us recently to lower our forecast of economic growth and increase our forecasts for unemployment and inflation.

We now expect:

• Full-year 2025 economic growth of less than 1%, down by a percentage point. Real-time signals point to a material slowdown in GDP growth in the first quarter.
  
  
• Inflation of nearly 4% this year.
  
  
• Two interest rate cuts (each 0.25 percentage point) by the Federal Reserve in the second half of 2025, leaving its target for short-term rates at 3.75%–4%. That’s 0.25 to 0.5 percentage point higher than most market participants are pricing in for year-end.
  
  
• A year-end unemployment rate of about 5%, up from our prior forecast of 4.5%. In March, unemployment stood at 4.2%.
  
   

The Bank of Canada has paused its interest rate-cutting cycle, but we forecast a couple more rate cuts by year-end.

We expect:

• Full-year 2025 economic growth of about 1.25%, down by 0.5 percentage point from our prior outlook.

• Full-year core inflation of about 2.5%, up from our previous forecast of 2.2%. Price increases of core items, which exclude volatile food and energy components, eased to 2.4% year over year in March.
  
  
• A year-end Bank of Canada policy rate of 2.25%, down from the bank’s current target of 2.75%. We don’t foresee a worst-case scenario for tariff implementation, which would allow policymakers to be dovish in the face of slowing economic growth.
  
  
• A year-end unemployment rate of about 7%, up from 6.7% in March.
  
   

The region faces economic challenges due to elevated tariffs and related uncertainty, which are likely to counteract the gains from German fiscal stimulus.

We expect:

• Economic growth in 2025 of less than 1% and growth next year of about 1%. We anticipate that the effective tariff rate on euro area goods will rise to around 15% this year, which would pull down economic growth.
  
  
• Core inflation, which excludes food, energy, alcohol, and tobacco prices due to their volatility, to end 2025 just below 2%. Such prices were up 2.4%, on a year-over-year basis, in March.
  
  
• The European Central Bank to cut policy rates twice this year, to a year-end rate of 1.75%. Its current deposit facility rate is 2.25%.
  
  
• An unemployment rate of about 6.5% at year-end, up from the current record low of 6.1%, in February.
  
   

The economy is facing challenging domestic forces, with core inflation falling more slowly than expected and the labor market deteriorating.

We expect:

• Economic growth in 2025 of about 0.5%, modestly lower than our prior forecast. Our outlook had already reflected a deterioration in forward-looking data, particularly for the labor market. Tax hikes, still-restrictive monetary policy, and a softening external environment are all weighing on demand.
  
  
• Core inflation to fall to around the central banks 2% target in 2026. Core prices, which exclude food, energy, alcohol, and tobacco due to the volatility of their prices, were 3.4% higher in March than one year earlier.
  
  
• The Bank of England to cut the bank rate quarterly, leaving it at 3.75% at year-end. It is 4.5% today.
  
  
• The unemployment rate to end the year around 4.8%, up from 4.4% for the December-through-February period.
  
   

An upward wage-price spiral leaves intact our view that the Bank of Japan will continue its gradual rate-hiking cycle, even amid elevated trade uncertainty.

We expect:

• Declining price competitiveness and weaker U.S. demand for Japanese goods to dent Japan’s economic growth by half a percentage point in 2025, leaving full-year growth of less than 1%.
  
  
• Steady wage growth on the back of strong corporate profits and structural labor shortages to support a recovery in domestic consumption and keep core inflation robust at around 2% this year. Core inflation excludes fresh food prices.
  
  
• The Bank of Japan to raise its policy rate (currently 0.5%) to 1.0% by year-end. However, amid heightened trade uncertainty, risks of a lower year-end policy rate are growing.
  
   

China's economy had a strong first quarter, but the global trade environment suggests challenges ahead.

We expect:

• Full-year 2025 economic growth just above 4%, with risks to the downside. We previously forecast 4.5% growth. We foresee the Politburo meeting this month as an opportunity for the announcement of supportive policy measures. But we don’t expect such measures to fully offset U.S. tariffs.
  
  
• Full-year core inflation of about 0.5%, and headline inflation to be even lower. Although food represents about 30% of China’s Consumer Price Index and the price of imported agricultural products could rise, that would likely be offset by energy and commodities prices pressured lower amid slowing global growth.
  
  
• On the monetary policy front, a 0.3 percentage point cut to the central bank’s seven-day reverse repo rate and 0.5 point of cuts to banks’ reserve requirement ratios.
  
   

We have advanced our expectation for the timing of the next Reserve Bank of Australia rate cut, from the third quarter to May.

We expect:

• Full-year 2025 economic growth of about 2%, with risks tilting to the downside.
  
  
• Trimmed mean inflation of about 2.5% at year-end, with downside risk due to global growth.
  
  
• The central bank to cut the policy cash rate target by 0.25 percentage point at its May 20 meeting, with a year-end policy rate of 3.5%.
  
  
• The unemployment rate to rise to about 4.5% this year amid still-restrictive interest rates.
  
   

Recent economic conditions in Mexico have been negatively affected by trade-related uncertainty, leading to an economic contraction in the fourth quarter of 2024.

We expect:

• Economic growth of less than 1% this year, down from our previous forecast of a range of 1.25%–1.75%.
  
  
• Core inflation of about 3.5% in 2025, above the midpoint of the central bank’s 2%–4% target range.
  
  
• The central bank to continue its easing cycle, with the rate ending 2025 in a range of 8%–8.25%.