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Investing.com -- The global economy is expected to experience a slight slowdown in growth over the next couple of years, according to a new outlook from Capital Economics.
The report indicates that President Trump’s policies will likely weigh on US economic activity, while China’s growth may suffer from reduced fiscal policy support.
Despite these challenges, India is projected to be a relative bright spot in the global economy.
While tariffs are expected to negatively impact global trade, Capital Economics suggests the overall effect should be "fairly modest" as long as countries limit their retaliations and China successfully reroutes most of its exports.
Inflation is forecast to continue moderating globally, giving central banks room to cut interest rates.
However, in the United States, a tariff-induced rebound in core goods inflation may keep the Federal Reserve from implementing rate cuts for the remainder of this year.
For the US specifically, Capital Economics predicts GDP growth will slow to 1.5% annualized, with core PCE inflation rebounding to slightly over 3% later this year.
The Fed is not expected to cut rates until next year due to concerns about persistent price pressures.
The Euro-zone is projected to maintain sluggish GDP growth despite Germany’s looser fiscal policy next year.
Inflation is expected to remain around target, with the European Central Bank nearing the end of its easing cycle.
In Japan, the Bank of Japan is forecast to resume its tightening cycle before year-end as inflation exceeds the Bank’s forecast, eventually hiking rates to 1.5% by 2027.
The outlook for other regions varies significantly. Capital Economics expects Canada to enter a recession due to US tariffs and trade policy uncertainty.
China’s GDP growth is projected to slow from nearly 5% last year to 3.5% in 2025 and 3% in 2026.
India stands out with projected growth of 7% over the next two years, making it a "global outperformer" according to the report.
The Middle East outlook has improved somewhat, with the Iran-Israel ceasefire removing an immediate downside risk to Gulf economies, though lower oil prices and tighter fiscal policies are still expected to weigh on regional GDP growth.
For commodities, most prices, particularly oil, are forecast to fall over the next two years as supply increases, though tariffs could create upside risks for metals prices in the near term.
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