June Global Macro Monthly - Fiscal anchors

Global Macro Monthly Summary June 2025

By Francois Cabau, Senior Economist, Macro Research

Geopolitical tensions rachet up risks to growth

Following Israel’s large-scale strike on Iran on 13 June, tensions escalated quickly between the two countries. On 22 June the US took the unprecedented step of bombing Iran’s nuclear facilities. Given so far limited response from Iran, oil prices have eased from their peak and are, at the time of writing, only 7% higher than in the middle of May, from 20%) thanks to a – possibly fragile – ceasefire. Yet, tension in the Middle East could always flare up again, constituting another downside risk to global growth.

Prominent geopolitical risks also include a re-intensification of the Russia-Ukraine conflict as US peace efforts to date have gone nowhere. Yet, trade uncertainty has receded with a de-escalation of the US-China trade war following talks in London. Yet, the level of uncertainty remains daunting, especially after 9 July, when the reciprocal tariffs 90-day pause could elapse. A continuation of the talks – at least with the EU – beyond 9 July is likely and suggests the US would rather avoid unilateral action but this also means that European producers will have to endure further uncertainty on their US exports.

Following a large upside revision to Eurozone Q1 GDP growth (from 0.3% to 0.6% on a quarterly basis), we have made slight changes to our growth forecasts, moving some of the anticipated weakness from Q3 into Q2. Heavier trade frontloading will make the growth path more volatile, and the bloc will now only flirt with recession. We maintain our below-consensus view that 2026 growth is likely to be lower than 2025, at 0.6% and 0.9% respectively.

Monetary policy under (heavy) constraints

The Federal Reserve (Fed) maintained its policy rate at 4.25%-4.50% on 18 June. The Federal Open Market Committee (FOMC) struck a hawkish note in its forecast revisions reflecting their concerns about the looming supply shocks in the US economy (tariffs and immigration crackdown). The median projection for the Fed Funds Rate (FFR) was revised up for next year, with only 30 basis points (bps) worth of cuts against 50bps projected in March, and 20bps in 2027 against 30bps in March. We find it striking that in the last year of the forecasting horizon, the FFR would remain 40bps above the committee’s estimate for the long-run level (3.0%).

At the other end of the spectrum of developed market central banks, the Swiss National Bank cut its main policy rate by 25bps to 0%, as anticipated, though maintained a reluctance to go into negative territory again. This suggests that more currency intervention may be on the way.

Currently, all central banks face a very high level of uncertainty. This environment contributed to a somewhat dovish Bank of England meeting in June, where rates were left unchanged at a still-high level (4.25%), but a higher-than-expected level of dissent between its Monetary Policy Committee illustrates the difficulty in navigating the current backdrop. Meanwhile, the latest European Central Bank meeting was on the hawkish side: now that rates are back to 2% – a level widely viewed as the neutral rate – the bar for further cuts is high.

All eyes on fiscal

After some bond market pressure in the US, UK and Japan over the recent weeks, there has been some respite – though we do not think the root causes have disappeared. Our Theme of the month delves into the specifics.

In the US, the ‘One, Big Beautiful Bill’ is now being debated in the Senate, with a vote eyed for early July. Given that Republicans hold a majority in the upper house, the Bill’s main thrust is likely to remain intact, although it may undergo some potentially small changes, particularly on section 899 relating to additional taxes on foreign investors and companies. We remain concerned about US public debt sustainability, with markets likely to respond (again).

A difficult growth path for France and the UK is likely to further constrain government choices while emerging markets, such as Romania, Poland, Colombia and Thailand should be closely monitored.

By contrast, we continue to think Japan’s fiscal situation is not quite as fragile as it first appears. Germany has significant fiscal policy headroom and has stated clear intentions to use it. We do not expect this to be a gamechanger in the short run, given that funds will take time to be deployed, and the economic outlook remains overshadowed by external downside risks, along with the government only just about finalising its 2025 budget. However, we have turned more buoyant with regards to medium-term prospects.