Inflation, growth, tariffs: the tug-of-war in 2025

June 17, 2025 - 3 min read

Global Product Manager – DNCA Finance

Has recent volatility changed your outlook for the US?

Recent announcements by the Trump administration on immigration and tariffs have of course increased the odds of a global slowdown, but especially in the United States, recession is still far away and hard to anticipate by looking at hard data. Confidence surveys and soft data have indeed deteriorated in the last few weeks. To understand where we really stand, there are a few key indicators to monitor. Even if for now, the actual impact of the Trump's administration on prices and growth is uncertain, there is no doubt that it is creating upside risks for inflation and downside risks for growth, especially in the labor market. For now, inflation is still relatively low and the labor market strong. Should we see a deterioration of the labor market in the coming months, less hiring, more layoffs, job cuts, etc. then we can start to anticipate a more pronounced slowdown that could encourage the Fed to start cutting rates again. However, if at the same time inflation starts to pick up with signs that it is spreading beyond goods that are directly impacted by tariffs, then the Fed could find itself in a difficult spot with its two objectives in contention and may have to stop cutting despite a weaker labor market. Therefore, the key lies in the hard data of the coming months and whether or not they will allow the Fed to cut rates.

Has it changed your outlook for Europe?

For Europe, the growth outlook is more balanced. We still expect weak but positive growth through the old continent. On the one hand, the trade war with the US is weighing on growth expectations and certain industries could be more exposed than others. On the other hand, the announcement of the German fiscal stimulus plan centered around defense and infrastructure coupled with an EU defense spending plan has renewed hopes of better than expected growth. However, the impact of this plan should be spread thin over many years. Defense is not the most productive industry, especially should the Russia/Ukraine situation cool down. So the actual impact on growth in the short term appears limited in an environment where risk premium have started to reappear, and rate curves have steepened all around the world.

Why would you say 2025 will be a good year for active fixed income?

2025 should be a good year where the opportunities offered by the increased volatility will be complimented by positive carry and roll down effects more generally. Such an environment advocates for a higher level of duration in the portfolio compared to previous years. However, we are convinced that current fiscal policies are unsustainable in most countries. So there is a need to be selective in our investments to protect ourselves against the widening of credit spreads.

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