U.S. Quarterly Economic Forecast

Economists are still suffering from whiplash following the twists and turns of U.S. trade policy. But despite all the back and forth, our forecast for the global economy is broadly unchanged from our view in June. Global growth is on track to advance 3.1% this year, with a slight slowdown in the cards for 2026. In the euro area, GDP rose at a 0.4% annualized pace in Q2, slightly above expectations but sharply slower than the 2.4% pace in Q1. China expanded 5.2% year-on-year in Q2, stronger than forecast, though weak credit growth and continued property stress point to softer momentum in the second half. Japan’s economy grew at a 1.0% annualized rate, beating expectations.  

 On the trade front, risks have eased for now: the U.S. capped tariffs on the EU at 15% in July, the U.S. extended their truce with China and Mexico in August for 90 days, and the U.S. and Japan reached a limited accord preserving market access. Yet frictions persist, with China imposing new duties on European agricultural goods, and there remains considerable uncertainty around the direction of trade policy once temporary truces expire and if the U.S. Supreme Court rules against the legality of IEEPA tariffs. Front running leading up to President Trump’s reciprocal tariff deadline, originally set for July but subsequently delayed, led to a pull-forward of industrial output and inventory builds. This will likely result in a choppy pace of growth across both advanced and emerging markets depending on trade exposures. The result is a global economy that continues to advance on average, but at an unspectacular pace with divergence among countries. This modest pace is supported by domestic demand and services but constrained by weak goods trade and unsettled policy risks.  

U.S. economy softens, more rate cuts ahead 

Broadly speaking, the economic narrative remains the same for the U.S. economy as in our June forecast, with growth on track to expand by 1.8% this year. Shifting trade policies remain the biggest source of uncertainty in our forecast and downside risk for the U.S. economy. Given recent trade deals reached with the EU and Japan, we have raised our assumption for the effective tariff rate on imports over the medium term (Chart 1). Higher tariffs have contributed to a slight downgrade to growth in 2026, which is now expected to remain steady at 1.8%, a few tenths lower than in June, although a larger than expected response to the tax cuts in the One Big Beautiful Bill Act is a source of upside risk.  

Shifts in tariff policies contributed to volatility in growth over the first half of the year, although private domestic demand held up better than we had expected thanks to sizeable gains in business investment. Business spending on both equipment and intellectual property products, most notably on software, has been very strong. Some of these investments were likely businesses pulling forward outlays to get ahead of any tariff related price increases. But the sizeable increase in computers & other electronics and software investment may represent increased outlays on AI tools. Further gains in computer and electronic imports in July suggest the push on equipment spending could continue into the third quarter. 

Consumers have not held up as well. Consumer spending growth more than halved in the first half of the year, to a 1.6% pace as households pulled back on spending on discretionary services in the face of a softer labor market among other impediments (see report). These challenges are expected to restrain consumer spending below 2% over the next four quarters (Chart 2), before lower interest rates, cooler inflation, tax cuts and a better job market push spending back up to a more trend-like 2% pace towards the end of 2026.  

The cooling in the labor market has increased the risk of recession and caught the attention of the Federal Reserve. The FOMC resumed lowering interest rates in September, and we expect two more cuts this year. Even though inflation is expected to run above the Fed’s 2% target for some time, data revisions have revealed a more pronounced slowdown in hiring earlier than initially thought, suggesting that the Fed funds rate at 4.5% was too restrictive to foster maximum employment. We expect employment to soften further, leading to net job losses in the fourth quarter and pulling up the unemployment rate to 4.4%. We expect the FOMC to make further interest rate cuts next year to reach a resting point at 3.25%, unchanged from our view in June. Our year-end forecasts for longer-term Treasury yields have come down slightly, reflecting increased conviction by financial markets that the Fed will need to bring rates down from their current restrictive level.