Global Fixed Income Strategy - March 2025
We’ve downgraded our 2025 US growth forecast - but no recession
We have downgraded our growth forecast for the first half of 2025 from the mid-2% range to 1.7%. For the second half, we had already anticipated a slowdown, and we maintain that outlook. We now project 2025 GDP growth at 1.7%, down from our previous estimate of 2.0%. The primary reason for the downgrade is rising policy uncertainty and declining consumer and business confidence.
We are not projecting a recession at this point. In this environment, we believe companies will be more likely to delay hiring and capital expenditure decisions than downsize. US household and corporate balance sheets and overall private sector financial conditions have been resilient, limiting the risk of a deep downturn, in our view.
Recession risks remain elevated because restrictive and inflationary policies are likely to keep uncertainty high, markets uneasy, and hinder confidence. More aggressive trade, fiscal, and other policies could shift our baseline projection toward recession. The probability of our baseline growth view remains at 45%, while the alternative recessionary risk scenario still stands at 35%.
For the Federal Reserve (Fed), policymaking will likely be challenging, given the risks on both sides of its dual mandate, including higher inflation and the rising risk of a slowdown. We expect the Fed, which already has an easing bias, to deliver three rate cuts in June, September, and December. The reason for these cuts is a slowing economy.
We expect inflation to rise in our baseline scenario, but, excluding the potential tariff impact, only modestly. This outcome could allow the Fed to look through any increase in inflation that does occur and place greater emphasis on growth. On the other hand, tariffs could be aggressive, causing a significant inflation impact. In that case, we would likely switch to our recession scenario. There is fluidity between these scenarios at this point due to the lack of policy clarity.
Investment risks
The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.
Fixed-income investments are subject to credit risk of the issuer and the effects of changing interest rates. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. An issuer may be unable to meet interest and/or principal payments, thereby causing its instruments to decrease in value and lowering the issuer’s credit rating.
Non-investment grade bonds, also called high yield bonds or junk bonds, pay higher yields but also carry more risk and a lower credit rating than an investment grade bond.
The risks of investing in securities of foreign issuers, including emerging market issuers, can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues.
The performance of an investment concentrated in issuers of a certain region or country is expected to be closely tied to conditions within that region and to be more volatile than more geographically diversified investments.
