Adrian Schmidt

Senior FX Strategist

Dave Sloan

Senior Economist

North America

PakLai Ng

Technical Analyst

Cephas Kin Long Yung

FX Analyst

Mike Macdonald

Senior Technical Strategist

Volkan Sezgin

Senior EMEA Economist

Sanya Suri

Senior Asia Economist

Marlon Chacon

Senior Quantatitive Economist

Mike Gallagher

Director of Research

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Our September Outlook is now published and please see all our economic and policy chapters below.  

September Outlook: Into 2026

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&middot;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Other DM economies have the headwind of tariffs on U.S. trade, but economic recoveries are also being restrained by population aging; slow productivity and in certain countries cautious consumers. Tariffs outside the U.S. are also disinflationary, as they hurt exports and employment; and as China is seeking to redirect excess production at competitive prices. This points to further easing from the ECB and BOE, though fiscal policy is mixed with UK tightening but Germany easing. &nbsp;Further BOJ rate normalization will be slow, as inflation slows.&middot;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; For EM countries, the tariff reality is also a headwind for exports and capex, with the scale influenced by the scale of openness for the economies. For China, a modest consumer, plus continued drag from residential investment, structural drag from population aging and slowing productivity points to a trend slowdown to 4%.&nbsp; However, further fiscal stimulus is highly likely and suggests 2026 GDP growth of 4.5%. &nbsp;India should prove resilient, due to domestic stimulation.&nbsp; Brazil will likely slow as the lagged effects of very tight monetary policy feed through.&nbsp; &nbsp;&middot;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Geopolitically our baseline (70%) remains for the war in Ukraine to drag into 2026, as Putin maintains a hard line stance and talks fail to reach a ceasefire or peace deal. President Xi could ask Trump for an understanding on Taiwan reunification, but the U.S. is likely to keep the strategic ambiguity policy.&nbsp; While this strategic ambiguity policy towards Taiwan remains in place, a military invasion of Taiwan would be too high risky for Xi (<a target="_blank" href="https://continuumeconomics.com/a/cbf29fe7/taiwan-grey-warfare-or-naval-quarantine">here</a>).&middot;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; For financial markets, the U.S. equity market is overvalued and at risk of a correction in the coming months, especially with any bumpiness in the economic slowdown. &nbsp;For most DM government bond markets, we look for further yield curve steepening, both on easing and as the combination of budget deficits and QT means heavy supply for the market to absorb (<a target="_blank" href="https://continuumeconomics.com/a/be783f80/dm-rates-steeper-yield-curves-more-to-come">here</a>) &ndash; Japan is more complex with BOJ tightening and QT.&nbsp; The USD downtrend will resume at a modest pace against DM currencies, but more mixed versus EM currencies.&middot;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Risks to our views: A hard landing in the U.S. economy would spillover globally in GDP terms and we have raised the risk of a U.S. recession from 25% to 30%. &nbsp;While this would likely trigger more aggressive Fed easing, it could still prompt a bear market in U.S. equities, and a noticeable decline in the USD.&nbsp;&nbsp;Figure 1: Economic Scenarios<figure class="image"><img src="https://assets.continuumeconomics.com/storage/uploads/68d1774683474.JPG" style="width:100%;"></figure>Source: Continuum EconomicsMarket ImplicationsFigure 2: Asset Allocation for the Next 15 Months<figure class="image"><img src="https://assets.continuumeconomics.com/storage/uploads/68d157c498be3.JPG" style="width:100%;"></figure>&nbsp;Source: Continuum Economics Note: Asset views in absolute total returns from levels on September 23 2025 (e.g., 0 = -5 to +5%, +1 = 5-10%, +2 = 10% plus).&middot;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Government Bonds.&nbsp; The clearest process is further yield curve steepening.&nbsp; On our baseline, this would mean consistent easing from the Fed that drags down 2yr yields, with 10yr yields falling further in the next 6 months but drifting back up above 4% as the economic weakness is seen to be a mid-cycle slowdown.&nbsp; On a harder landing, 10yr U.S. yields can come down to 3.5%, but 2yr falling even more.&nbsp; Meanwhile, we see 10yr Bund yields at 3.00% by end-2026 on Germany fiscal expansion and an end to the ECB easing cycle.&nbsp; Finally, 10yr JGB yields will likely reach 1.75-2.00% region in 2026, as we see one further 2025 hike followed by a 25bps hike in Q1 2026 and on very large BOJ QT. &nbsp;&nbsp; &nbsp;&middot;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Equities. &nbsp;Softening of economic data can cause a new 5-10% correction in U.S. equities, alongside further intermittent tariff action from Trump.&nbsp; Recovery should be seen by end-2026 to 6600 end 2026 &ndash; Fed rate cuts, soft landing and share buybacks.&nbsp; A hard landing means a sharp selloff to 5000.&nbsp; Other DM markets will follow the U.S., as less overstretched valuations are countered by domestic structural problems.&nbsp; &nbsp;India can track other markets in the next 6 months, but should outperform the U.S. by 5% by end 2026. &nbsp; &nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&middot;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; FX. &nbsp;Prospects remain for DM currencies to make further moderate gains versus the USD in the next 15 months. &nbsp;Foreign investors are concerned about being overweight U.S. assets, with erratic Trump administration policymaking, overvalued USD and U.S. equities.&nbsp; &nbsp;EM currencies will be more divergent, with Turkish Lira forecast to fall on stubborn inflation, but the Brazilian Real likely to gain further ground versus the USD on very high yield spreads.&nbsp;&middot;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Commodities. OPEC is now reversing the 2nd set of voluntary oil production cuts from 8 countries, which shows a keenness to sell oil.&nbsp; While EM demand growth is still reasonable, this extra supply will likely eventually mean a further decline in oil prices in 2026.&nbsp; We see WTI at and USD53 by end-2026. &nbsp;&nbsp;Figure 3: Key Events<figure class="table"><table><tbody><tr><td style="background-color:#DDE5EA; border:1.0pt solid white">From July 2025</td><td style="background-color:#DDE5EA">French Parliamentary Election</td><td style="background-color:#F2F2F2">The surprise snap parliamentary election in July last year, much to President Macron&rsquo;s consternation, actually made his minority government even weaker, instead creating three clear factions with the legislature.&nbsp; A fresh government has been toppled but a new one is being formed facing key battles over immigration, pension reform and the budget any of which could see it toppled too.&nbsp; Opinion polls suggest that if/when a fresh election occurs, this will not change parliament materially with adverse fiscal and economic implications.&nbsp; President Macron has ruled out fresh elections but he may come under pressure to resign, although he is likely to try and complete his term which runs to 2027. But the political impasse, via any possible fiscal and economic crunch could yet trigger further political upheaval.&nbsp;</td><td>&nbsp;</td></tr><tr><td style="background-color:#DDE5EA">October 26, 2025</td><td style="background-color:#DDE5EA">Argentina Legislative Election</td><td style="background-color:#F2F2F2">Argentina will hold legislative election in October 2025. Half of the Chamber of Deputies (127 seats from 257) will be renovated for a four-years mandate. Additionally, one third of the Senate (24 seats for 74) will also up for a 6-years mandate. Most of the polls are suggesting that President Javier Milei will now find it difficult to increase the participation of his far-right party, La Libertad Avanza, in both houses. Protests has grown against the fiscal austerity, which has helped the centre left Peronists. &nbsp;</td><td>&nbsp;</td></tr><tr><td style="background-color:#DDE5EA">May 2026</td><td style="background-color:#DDE5EA">Powell Replaced as Fed Chair</td><td style="background-color:#F2F2F2">It sees certain that Trump will replace Powell as Fed Chair. Should Trump choose a current Fed Governor such as Waller or Bowman, markets would probably feel some relief as both, while likely to be more dovish than Powell, would seek to maintain Fed credibility on inflation. A former Fed official such as Warsh or Bullard would also cause limited alarm. An outsider to the Fed, particularly if not familiar to the markets, would be more concerning, but Trump is still unlikely to be able to build an FOMC where the majority of voters are subservient to his will.</td><td>&nbsp;</td></tr><tr><td style="background-color:#DDE5EA">September 13, 2026</td><td style="background-color:#DDE5EA">Sweden General Election</td><td style="background-color:#F2F2F2">The current right-wing coalition still has very slim effective majority in parliament even with the far-right Sweden Democrats offering support.&nbsp; This is all the result of the 2022 election, which brought a fragmented result but locking out the Social Democrats even though they are the largest party.&nbsp; This fragmentation was a result of a more polarized parliament and polls suggest more of the same, but with a general drip more to the left.&nbsp; But even if left-leaning parties return to power, it unlikely to change much given the current focus on defence but where an election issue may be a speedier defence build-up.</td><td>&nbsp;</td></tr><tr><td style="background-color:#DDE5EA">By September 20, 2026</td><td style="background-color:#DDE5EA">Russia Parliamentary Elections</td><td style="background-color:#F2F2F2">Russia is set to hold its next parliamentary elections by September 20, 2026 to determine the State Duma, the lower house of the Federal Assembly. All 450 seats are up for grabs, with 226 needed for a majority. As of current polling trends, United Russia (YeR) leads with around 53% support, potentially securing 266 seats; Communist Party (KPRF) trails with 13%, projected to win 65 seats; and Liberal Democratic Party (LDPR) holds 11%, aiming for 54 seats. We expect United Russia, led by Dmitry Medvedev, remains dominant after its 2021 victory.</td><td>&nbsp;</td></tr><tr><td style="background-color:#DDE5EA">October 4 and 25, 2026</td><td style="background-color:#DDE5EA">Brazil General Election</td><td style="background-color:#F2F2F2">In 2026, Brazil will hold general elections to elect the next President, renew all the Chamber of Deputies seats, and two-thirds of the Senate, while also electing the governors of all Brazilian states. Lula will likely seek re-election, while opinion polls suggest Lula will likely face Freitas (an ex-Bolsonaro minister <a target="_blank" href="https://en.wikipedia.org/wiki/Tarc%C3%ADsio_de_Freitas">here</a>). However, any irrational decisions by Bolsonaro, such as nominating his wife or son for the presidency resulting in a fragmented opposition, cannot be ruled out.</td><td>&nbsp;</td></tr><tr><td style="background-color:#DDE5EA">November 3, 2026</td><td style="background-color:#DDE5EA">U.S. Mid Term Elections</td><td style="background-color:#F2F2F2">All seats in the House and a third of the seats in the Senate will be up for election.&nbsp; With the current Republican majority in the House of five seats being marginal even a modest level of disappointment in the Trump administration, which seems likely, could see the Democrats gain control of the House, but it will be a lot harder for the Democrats to make the necessary gain of 4 seats in the Senate.&nbsp; We think a recession may be required to see the Democrats take the Senate.</td><td>&nbsp;</td></tr></tbody></table></figure>&nbsp;Source: Continuum Economics

·       The critical question is how much the U.S. economy is slowing down with the feedthrough of President Donald Trump's tariffs to boost inflatio

Outlook Overview: Into 2026

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Economy resilient, but labor market slowdown will restrain consumers&nbsp;&nbsp;The U.S. economy has slowed, and with employment growth now minimal looks set to slow further. However it does not appear to be on the cusp of recession. A strong 3.3% annualized rise in Q2 GDP needs to be seen alongside a 0.5% decline in Q1, leaving an average of 1.4%, but final sales to private domestic buyers increased by 1.9% in each quarter, suggesting a near potential underlying pace outside tariff-induced volatility in net exports and cuts in government. Business investment has been strong, particularly intellectual property which has been lifted by the spread of artificial intelligence. Consumer spending has lagged behind real disposable income, which grew by 2.5% in Q1 and 3.0% in Q2, albeit supported by some one-time factors. Historical revisions to GDP data due on September 25 do however need to be watched.&nbsp;<figure class="image"><img src="https://assets.continuumeconomics.com/storage/uploads/68d16dd786f48.jpg" style="width:100%;"></figure>Employment growth through March 2025 has been revised down by 911k, suggesting trend had already fallen below 100k per month by then, and appears to be slowing further with August&rsquo;s three month average only 29k. However, slowing labor force growth means that the unemployment rate is edging only marginally higher, with the August 2025 rate of 4.3% only marginally above 4.2% seen 12 months before. Initial claims, while having increased recently, remain consistent with limited layoffs. Still, minimal employment growth will restrain consumer spending, particularly if tariffs boost inflation to contain real wage growth. We expect growth in consumer spending to fall to 0.5% annualized in Q4 2025 and Q1 2026, underperforming GDP which we expect to rise by 1.0% in each of those quarters. Fed easing is likely to help growth pick up into the second half of 2026, but a return to 2.0% will be difficult to achieve with limited increases expected in the labor force. We expect GDP to rise by 1.7% in 2025 and 1.4% in 2026 by calendar year, with the Q4/Q4 gains being 1.2% in 2025 and 1.5% in 2026.&nbsp;&nbsp;Tariffs to continue a gradual pass through to inflation&nbsp;Tariff rates are a little higher than we anticipated in June, though retaliation on US exporters has been mostly modest. The tariff impact on inflation so far has been modest, but visible in goods inflation. Uncertainty remains high with the Supreme Court set to consider an appeals court ruling against Trump&rsquo;s reciprocal and fentanyl tariffs. While Trump&rsquo;s claim that trade deficits represented an emergency is a dubious one, we expect the Supreme Court will rule in favor of these tariffs, though we would not rule out the possibility of them seeking some middle ground. If the Supreme Court does rule against these tariffs, Trump has legal means that he could pursue to impose other tariffs, and deals made with various trading partners are likely to stick. Still, one reason tariffs have not been fully passed on to consumers yet is likely to be uncertainty over their eventual magnitude. Continued uncertainty is likely to keep the feed through from tariffs to inflation gradual, though ultimately a substantial pass through will be difficult to avoid.&nbsp;<figure class="image"><img src="https://assets.continuumeconomics.com/storage/uploads/68cd7aea4308b.jpg" style="width:100%;"></figure>We expect annualized growth in core PCE prices above 3.0% in Q3 and Q4 of 2025 and Q1 of 2026. Some slowing is likely after that but we expect the rate to remain above 2.0% even in the second half of 2026, and with the economy likely to be regaining momentum by then the rate may settle slightly above the Fed&rsquo;s 2.0% target. This will be the consequence of a less globalized world and tighter immigration controls restricting growth in the labor force. We expect yr/yr growth in core PCE prices of 3.1% in Q4 of 2025 and Q1 and Q2 of 2026, before a slowing to 2.6% in Q4 2026. We expect core PCE prices to average 2.9% in both 2025 and 2026, while CPI rises to 3.0% in 2026 from 2.8% in 2025, though we see CPI at 2.8% yr/yr in Q4 2026, down from 3.2% in Q4 2025.&nbsp;&nbsp;Tariffs are providing the government with revenue, which is likely to see budget deficits edging slightly below 6.0% of GDP in 2026 rather than rising to 7.0% of GDP as would have been the case without tariffs under the &ldquo;Big Beautiful Bill&rdquo;. That bill will provide support to consumers from tax cuts and most of its spending cuts will be delayed until after the 2026 midterm elections. That tariff revenues look set to be substantial means the eventual pass through to consumer prices will also be, even if it takes time to fully arrive.Fed policy and political riskThe Fed is weighing upside risks to inflation and downside risks to employment, in an increasingly politically changed environment. Slowing in the labor market has seen easing start, and the pace of future moves will be data-dependent. Should non-farm payrolls turn significantly negative and unemployment rises quickly above 4.5%, the Fed could move aggressively below the neutral 3.0%. However under our soft landing view, in which payroll growth is near flat and unemployment gains limited, the Fed is likely to move gradually, particularly if inflation is lifted by tariffs, as the neutral rate gets closer. The latest Fed dots suggest two more 25bps moves this year, in October and December, &nbsp;but if inflation remains firm with payrolls near neutral a pause may be seen in Q1 2026. We expect two &nbsp;moves in 2026, in Q2 and Q3, once inflation moves off its highs. That would take the Fed Funds target range to 3.0-3.25%, close to where the Fed currently sees neutral. This may be a little lower than appropriate if the Fed fails to return inflation to the 2.0% target.&nbsp;Jerome Powell&rsquo;s term as Fed Chairman, though not as Governor, ends in May 2026 and Trump is certain to replace him with someone more dovish. If Trump selects a Fed insider, with Governor Christopher Waller the most likely choice, we doubt easing as rapid as Trump would wish would be seen in the absence of recession. However should Trump select a less known figure, and that individual is confirmed by the Senate, markets would be right to worry. Still, it will be difficult for Trump to achieve a FOMC voting line up in which the majority follow the President&rsquo;s wishes rather than their own assessment of what appropriate monetary policy will be. Policy slightly more dovish than appropriate is our expectation. A complete loss of Fed credibility is not.&nbsp;<figure class="image"><img src="https://assets.continuumeconomics.com/storage/uploads/68cd7af9f2349.JPG" style="width:100%;"></figure>Midterm elections in November 2026 &nbsp;look likely to see Democrats regaining control of the House, which will require only a small swing and the election is likely to be seen as a referendum on the Trump administration. However it is unlikely the Democrats will be able take control of the Senate unless the economy falls into recession. The economic consequences of the elections will be moderate, with the Trump economic agenda already in place, and unlikely to be dramatically altered before the elections of 2028 even if Republicans maintain control of Congress in 2026. The elections will however be significant in many other aspects of policy, some of which, notably immigration, would have indirect economic implications.&nbsp;Recession is a significant risk, we estimate at 30%, if weakness in employment leads to a sharp consumer pullback, generating the start of a vicious circle of declining consumption and employment. However, the Fed has the ability to respond to an emerging recession, and it appears likely that the Fed will do at least as much as it needs to keep any recession brief and moderate, potentially cutting the Fed Funds target to 2.0-2.5%. The risk of the Fed doing too much, and sustaining both economic growth and above target inflation is also a significant risk even if the Fed is able to largely sustain its independence.&nbsp;&nbsp;

•    GDP growth, supported in particular by business investment, was resilient in Q2, but growth in employment is now minimal and that will weigh on

U.S. Outlook: Fed Easing to Prevent Recession, but May Also 

U.S. Outlook: Fed Easing to Prevent Recession, but May Also Keep Inflation Above Target

Federal Reserve

Long Term Themes

Andrew Wroblewski

Senior Economist Western Europe

UK, Eurozone

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··       Yet again, and amid what may still be tightening financial conditions and likely protracted trade uncertainty, we have pared back the EZ ac

Eurozone Outlook: Resilience or Irrelevance?

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Our Forecasts<img src="https://assets.continuumeconomics.com/storage/uploads/68c95e186af7f.JPG" style="width:100%;"> &nbsp;&nbsp;&nbsp;Source: Continuum EconomicsChina continues to see positive and negative developments for the growth outlook. Key points to note&nbsp;&bull;&nbsp;&nbsp;&nbsp;&nbsp;Net exports. So far China has been able to weather the fall in exports to the U.S./Mexico by sustaining and growing exports to other countries. This will become progressively more difficult, as other countries become watchful of China&rsquo;s exports being rerouted. &nbsp;The 30% tariffs from the U.S. will also likely have more cumulative adverse effects as time goes on and reinforced by 40% transhipment tariffs through Vietnam and other countries. &nbsp;China&rsquo;s competitiveness and competition should still ensure that exports hold higher levels, but the H2 2025 contribution to GDP growth will be less. &nbsp;Net exports in 2026 depend on a trade deal with the U.S. Our baseline remains for a deal that reduces the current scale of tariffs, but the prospect of no deal and prolonged 30% tariff has increased to a 30% probability (Figure 1). &nbsp;President Xi could ask Trump for an understanding on Taiwan reunification, but the U.S. is likely to keep the strategic ambiguity policy. &nbsp;While this strategic ambiguity policy towards Taiwan remains in place, a military invasion of Taiwan would be too high risk for Xi (<a target="_blank" href="https://continuumeconomics.com/a/cbf29fe7">here</a>). On the baseline assumption of a deal, net exports should be a modest positive contribution to GDP growth in 2026.&nbsp;Figure 1: U.S./China Trade Scenarios &nbsp;<figure class="image"><img src="https://assets.continuumeconomics.com/storage/uploads/68c95d8f2f36b.JPG" style="width:100%;"></figure>Source: Continuum Economics&nbsp;&bull;&nbsp;&nbsp;&nbsp;&nbsp;Residential property still negative. &nbsp;The residential property sector is becoming less of a negative drag on GDP growth compared to 2024, but the drag will now likely be around -1.25% in 2025 and -0.75% in 2026. &nbsp;The collapse in new construction means the flow of new complete homes is getting closer to the rate of sale of properties, while house price declines are slowing in tier 1 and 2 cities. &nbsp;However, the overhang of complete and uncomplete homes remains large, especially in tier 3 cities. &nbsp;This can mean divergence in construction and related activities between tier 1 and 2 cities versus tier 3. &nbsp;Households are also cautious about purchases of residential property, as the 2021-23 period has left psychological scars and property still remains expensive versus earnings. Finally, government support is slowing the adjustment but has not provided a bottom for the housing market. &nbsp; &nbsp;&bull;&nbsp;&nbsp;&nbsp;&nbsp;Underlying consumer spending modest. &nbsp;Spending on appliances has been strong helped by government trade in programs, but this appears to have peaked. &nbsp;Other consumer spending is modest, as confidence has been hurt by the hit to housing wealth and uncertainty about employment and income growth. &nbsp;Modest consumption will likely be the underlying picture into 2026. &nbsp;It is also worth mentioning that China&rsquo;s population aging also has an impact on consumption, as people in their late 50&rsquo;s onwards have lower absolute consumption on average (<a target="_blank" href="https://continuumeconomics.com/a/9505c5e2/aging-slow-growth-for-some-in-2020s">here</a>). &nbsp;Government measures to boost consumption are modest in size and it remains unlikely that the government will engineer a major pivot to consumption through massive fiscal transfers; much bigger health/unemployment and pension safety nets and scrapping Hukou (the regulated migration from rural to urban). &nbsp;&nbsp;&bull;&nbsp;&nbsp;&nbsp;&nbsp;AI/High-tech production/Infrastructure spending. The bright spot for the economy remains AI and high-tech manufacturing with government support having helped ignite a spending wave in these areas that should be sustained well into 2026. &nbsp;China&rsquo;s manufacturing sector is also aggressively investing in robots to replace workers and increase profit margins. The agreed 2025 government infrastructure spending has also to be completed in H2 2025 and we also look for new infrastructure investment in 2026 to help try to push GDP growth back up again in 2026 after a slowing in H2 2025. &nbsp;Most will be announced at the March 2026 NPC meeting, but so could be announced in Q4.&nbsp;Overall, net exports contribution to GDP growth should be tempered in H2 2025, as 30% tariffs bite more progressively and other countries more closely monitor the redirection of China&rsquo;s exports. &nbsp;A trade deal with the U.S. remains our baseline, which should reduce tariffs to around 20% and help net exports be a modest GDP contribution in 2026. &nbsp;However, residential property investment remains a negative contribution to GDP, while underlying consumer spending is modest due to wealth effects and uncertainty over employment and income growth. &nbsp;H2 2025 will likely see a slowdown towards a 4% growth trend and overall, we forecast 4.8% for 2025. &nbsp;Growth in 2026 is dependent on new government infrastructure spending, but we see this being moderate and we maintain a 4.5% GDP forecast.&nbsp;Figure 2: CPI and PPI (Yr/Yr %) <img src="https://assets.continuumeconomics.com/storage/uploads/68c95d54b3a90.png" style="width:100%;">Source: Datastream/Continuum Economics&nbsp;China still faces aggressive disinflation however. &nbsp;We forecast -0.1% for 2025 CPI inflation and 0.1% for 2026, which reflects the excess of production over consumption. This is reflected in the continued decline in PPI (Figure 2) and the stiff competition in certain sectors &ndash; government directives could temper aggressive disinflation domestically. &nbsp;Nevertheless, we do not yet see signs that real sector purchases are being delayed by low/weak CPI inflation and this is not CPI deflation. &nbsp;Though the GDP deflator has seen persistently small negative outcomes in recent quarters, we see this as being the split of nominal GDP boosting real GDP at the cost of pushing the GDP deflator into negative territory. &nbsp;Real GDP remains more politicised than other data points, especially as weak GDP would be a sign of weakness in China/U.S. trade negotiations.&nbsp;Fiscal and Monetary Policy&nbsp;Further fiscal stimulus in 2025 now appear unlikely, as the economy is broadly on a trajectory of 5% real GDP growth and stimulus to combat disinflation is not a top political priority. However, further fiscal stimulus will be required for 2026, otherwise trend growth will be around 4.0%. We see infrastructure investment remaining the key element of extra fiscal stimulus and some could be announced Q4 ahead of 2026 and the usual main fiscal stimulus announcement at the March NPC meeting. Even so, there remains a concern in policy circles that the government deficit and debt trajectory mean only moderate fiscal space, with the authorities&rsquo; action suggesting that they believe the IMF estimate for the surging general government debt trajectory (Figure 3). &nbsp;One of the key problems is that tax/GDP remains low compared to other middle-income countries and the authorities are reluctant to fix this structural problem. &nbsp; &nbsp;Figure 3: China General Government Debt/GDP (%)<img src="https://assets.continuumeconomics.com/storage/uploads/68c95db40569a.png" style="width:100%;">Source: IMF Fiscal Monitor (April 2025) &nbsp;In terms of monetary policy, the authorities&rsquo; action continues to be restrained by concerns that too low interest rates could hurt China&rsquo;s banking system interest margins and lending. Additionally, internal PBOC opposition to ultra-low interest rates and QE remains significant. &nbsp; We look for no further reduction in the seven-day reverse repo rate and 25bps further in the RRR rate in 2025. &nbsp;We now also only see 10bps of reduction in the seven-day reverse repo rate in 2026 to 1.3% and 50-75bps reduction in the RRR rate. The PBOC also feels less pressure with M2 growth rebounding and with the Yuan500bln capital injection to the six state banks likely to be helping credit supply.&nbsp;

•    Overall, net exports contribution to GDP growth should be tempered in H2 2025, as 30% tariffs bite more progressively and other countries more 

China Outlook: Headwinds into 2026?

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·       Asia's growth trajectory in 2026 reflects regional resilience under strain. Investment-led economies like India and Malaysia are sustaining m

Asia/Pacific (ex-China/Japan) Outlook: Balancing Moderation 

Asia/Pacific (ex-China/Japan) Outlook: Balancing Moderation with Resilience

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Macro Newsletter

<figure class="image"><img src="https://assets.continuumeconomics.com/storage/uploads/68d1e90bd9bb3.png" style="width:100%;"></figure>&nbsp;&nbsp;<h3>Macroeconomic and Policy Dynamics</h3>The trajectory of consumption points upwards into 2026as wage growth regains traction after the framework of U.S.-Japan trade agreement has been set. Household spending has also shown signs of healthy growth in the past three months despite higher prices suggesting consumers are not holding back as much. The dynamics between higher price and steady consumption growth would be critical in terms of reaching the sustainable 2% inflation goal. However, choppy real wage will likely hinder the momentum in consumption recovery.&nbsp;<figure class="image"><img src="https://assets.continuumeconomics.com/storage/uploads/68d09ff572f26.png" style="width:100%;"></figure>Our forecast for 2025 GDP is revised higher to +1.2% to reflect the stronger rebound in private consumption and labor cash earnings. Economic growth is going to be normalized from more balanced wage/inflation dynamics and less exports after the 2025 export surge to the U.S. , thus 2026 GDP&rsquo;s forecast is +0.8%. Private consumption is expected to grow at a modest pace, driven by improving real wages. Headline labor cash earning has regained traction (+4.1% y/y in July) after the U.S.-Japan trade agreement capped any tariffs at 15% (Figure 1), providing the clarity business need to assess the impact. The stronger wage outlook supports the recovery of consumption, exacerbated by the moderation in headline inflation. Transitory factors, especially historic rice prices (poor harvest and residents stockpiling), have led us to a slight revision of 2025 headline inflation to +3.1% with 2026 inflation unchanged at +1.8%.While the effect of government budget cut has begun to show, the political uncertainty after LDP losing the majority in both houses and PM Ishiba&rsquo; resignation could see fiscal consolidation derailed. The LDP leadership election will be conducted on Oct 4. The top two candidates are Agriculture Minister Shinjiro Koizumi and former Internal Affairs Minister Sanae Takaichi. Koizumi is more popular among younger generations and tilted towards reform while Takaichi seems to be favoring more fiscal stimulus. The opposition party has been calling for reduction in consumption tax, which was initially rejected by the current ruling party LDP, may now be reconsidered as the LDP need the support of opposition to keep the ball rolling. The compromise from the Japanese government may lead to another budget slippage in the next fiscal year and worsen the overall fiscal health of Japan if tax is lowered at the same time. &nbsp;On the margin, a consumption tax cut could provide some temporary support to consumption.The strong export in H1 2025 are unlikely to be repeated as it is mostly stockpiling before the U.S. tariffs took place. Auto and chip export to the U.S. has fallen by more than double digits after the U.S. tariff activates. While Japanese export remain attractive in terms of quality and value, the 15% overall tariff will have a negative impact towards the overall trade balance in 2026/27 before Japan tries to redirect the supply to Europe and Asia. We also forecast 125 on USDJPY by end 2025, given Fed easing and the BoJ&rsquo;s tilt towards more tightening and this could further reduce the attractiveness of Japanese exports.&nbsp;&nbsp;<figure class="image"><img src="https://assets.continuumeconomics.com/storage/uploads/68d0a010907a2.png" style="width:100%;"></figure>The latest rhetoric from the BoJ suggest they are now seeing the 2% sustainable inflation target close to being reached in their medium-term outlook. The main reason is attributed towards the changing price/wage and consumption behavior. While the change in such behavior remains gradual, it stayed on the right track despite choppy real wage and with the consumer becoming less sensitive to price hikes. Yet, the pace and magnitude is likely to be more modest than BoJ forecast and its contribution to inflation would also be humble.The National y/y CPI has remained high in the past months on food price and a weak JPY. Despite headline CPI steadily moderating from 4% in Jan 2025 to 3.1% in July 2025, ex fresh food &amp; energy CPI is instead steadily rising to 3.4% in July 2025, the highest level since Jan 2024. It indicates the underlying inflationary pressure is more stubborn than the headline figure. Moreover, householding spending is seeing an expansive quarter (above 1%) and suggest more sustainable inflationary pressure going forward. Thus, we have revised 2025 headline CPI higher to be 3.1% y/y and 2026 is at 1.8%, with inflation mostly driven by the change in price/wage setting behavior.&nbsp;&nbsp;<h3>Policy Outlook</h3>The BoJ has kept their hawkish rhetoric by suggesting more tightening if economic forecast align with a 2% sustained inflation trajectory. With the U.S.-Japan trade deal concern in the past, the only obstacle left for the BoJ is political and fiscal uncertainty. Our central forecast sees the BoJ to hike by 25bps in the October 2025 meeting after the LDP leadership election and a subsequent 25bps in Q1 2026, to bring the policy rate to 1%. For the BoJ to move further from 1%, we will need to see a further adaption of higher price/wage from both Japanese consumers and SMEs owners and we feel that this will be slower than the BOJ needs to hike beyond 1% in 2026 &ndash; though we can see further normalization towards a 1.5% neutral rate in 2027.&nbsp;Meanwhile, the BoJ is well aware of the bond market&rsquo;s yield curve dynamics and planned to further reduce their pace of extra purchase by JPY200 billion after April 2026, which will increase the pace of QT. The BoJ will mostly allow yields to gradually go up along the curve yet verbal and actual intervention cannot be ruled out if we see a jump in yields. &nbsp;However, monthly BOJ bond purchases are set to scale down to Yen2.1trn by Q1 2027 and means heavy QT with maturing bonds, which we see pushing 10yr to 2% in 2026. &nbsp;This could cause the BOJ to slow the QT ramp up still further in the June 2026 review and also be cautious about BOJ policy rate hikes in H2 2026.Additionally, the BoJ announced their plans to sell their ETF and J-REITs holding. The BoJ holds more than 75 trillion JPY in ETF, around 7% of Japanese equities. Such indirect QT should not have a significant impact towards the outlook as the current magnitude and pace of selling indicates a timeframe that spreads across a century. The BoJ believe buybacks from Japanese firms and foreign inflow will be more than enough to absorb the offer and kept the doors open to further changes if they think there is market disruption.&nbsp;&nbsp;&nbsp;&nbsp;

•    The recovery in private consumption surprised to the upside is Q2 2025 because wage growth regained traction after clarity on the U.S.-Japan tr

Japan Outlook: Ready for Another Step

Bank of Japan

NORWAY

·       In the UK, we have upgraded 2025 growth by 0.2 ppt back to 1.0%, but pared back that for next year by a notch to a sub-par 0.8%. We think thi

Western Europe Outlook: Policy Divergences

Norges Bank

Swiss National Bank

Riksbank

Bank of England

EMEA Dynamics: Global Uncertainties and Diverse Domestic Dynamics RuleWe think volatile U.S. economy, trade tariffs, country specific factors, uncertainties about Chinese economy, and adverse geopolitical developments continue to rule the EMEA outlook, and could risk greater uncertainty over the EMEA medium-term prospects. EMEA monetary easing cycles continue to differ, as progress towards inflation targets and domestic factors vary. We continue to foresee EMEA countries will see divergent growth prospects, given differing levels of U.S. tariffs and internal growth dynamics.Inflation remains the major concern for EMEA economies since they remain elevated in Russia and Turkey while previous aggressive monetary tightening cycles are still feeding through helping inflation to follow a downward trend. South African Reserve Bank (SARB) decided to halt its easing cycle due to risks as annual inflation hit above the new 3% inflation anchor, and SARB is now assessing the impact of earlier cuts before restarting easing cycle. Taking into account that inflation started to soften in Russia after June, CBR resumed its easing cycle and reduced&nbsp;the key rate by&nbsp;100 bps to&nbsp;17% on September 12 highlighting&nbsp;current inflationary pressures are easing.&nbsp; Turkiye will likely resume its cutting cycle in Q4 2025 and 2026 unless a spike in inflation is seen and/or adverse domestic political developments occur.We think uncertainties about the DM economies coupled with negative impacts of U.S. additional tariffs could darken the EMEA growth prospects in 2026. For EMEA countries, additional tariffs are significant headwinds for exports and capex, with the scale influenced by the scale of openness for the economies. The content and the timing of U.S.- China trade truce will also be a significant for the EMEA trajectory. (Note: We think a trade deal should eventually be reached while this will likely only provide modest relief on tariff levels and will not provide a major boost for the Chinese economy into 2026). Chinese consumption is still modest and residential property and private business investment are weak could affect EMEA exports to China. Recession is a risk in the U.S. if we see a vicious circle of weakening consumption and employment and the critical question is how much the U.S. economy is slowing down with the feedthrough of Trump&rsquo;s tariffs to boost inflation and restrain GDP growth, which could worsen EMEA growth trajectories.Peace deals in Ukraine and Gaza coupled with lowered tension in the Middle East could particularly help Russian and Turkish economies to feel relieved, though our baseline is conflicts in Ukraine and Gaza to remain during the rest of 2025 and into 2026. (Note: Our baseline view in Ukraine is war drags into 2026 (70% probability), as Putin maintains a hard line stance and talks have failed to reach a ceasefire or peace deal yet).Figure 1: &nbsp;South Africa, Russia (LHS) and Turkiye Inflation (RHS) (%, YoY), January 2023 &ndash; August 2025<figure class="image"><img src="https://assets.continuumeconomics.com/storage/uploads/68d0f21bb66b8.png" style="width:100%;"></figure>Source: Continuum Economics, DatastreamSouth AfricaDespite South Africa facing challenges such as declining real per capita growth, high unemployment and poverty rates, the economy continues to enjoy inflation remaining within SARB&rsquo;s target band of 3% and 6%. Annual inflation stood at 3.3% YoY in August thanks to moderately slower food price growth and falling fuel costs. Despite this, there are some worrying signals about the course of the inflation heading to 2026, and we consider it is set to move over 4% in 2026 as increase in utility costs, climate-related agricultural disruptions, global commodity price shocks and ZAR volatility will likely continue to pressurize prices.Figure 2:&nbsp; CPI, Core Inflation (YoY, % Change) and Policy Rate (%), December 2018 &ndash; December 2025<figure class="image"><img src="https://assets.continuumeconomics.com/storage/uploads/68d0f233a51d0.png" style="width:100%;"></figure>Source: Continuum EconomicsWe feel another risk factor for the inflation trajectory is the power cuts (load shedding) as Stage 2-3 load shedding was implemented in Q2. (Note: Eskom recently announced there has fewer load shedding since Q2, and noted that its winter 2025 period concluded on August 31 with only 26 hours of electricity cuts across four evenings, supplying electricity 97% of the time to support South Africa&rsquo;s economy). Despite few load shedding in Q3, some energy analysts think blackouts are still a threat and further power disruptions are likely.One point of good news for South Africa&rsquo;s inflation outlook has been the recent drop in inflation expectations. The Bureau for Economic Research&rsquo;s (BER) latest survey for the SARB demonstrates that five-year inflation expectations have slipped to 4.2% in Q3, down from 4.5% last quarter, the lowest level since 2005.Under current circumstances, we foresee average inflation will hit 3.4% and 4.2% in 2025 and 2026, respectively, supported moderately by lagged impacts of previous tightening, and a relatively stable ZAR. We believe the key for the inflation trajectory will be the global developments, tariffs, oil prices and government&rsquo;s determination to address the electricity shortages, logistical constraints and financing needs. Global uncertainties such as 30% additional tariffs over South Africa is a threat confirmed by SARB who said the impact from the tariffs on growth and inflation could be modest, which is yet to be viewed in official data. However, it is worth mentioning that this is disinflationary, as it would hurt South Africa exports and output/employment.SARB held the policy rate at 7.0% during the MPC on September 18, as annual inflation in August hit above the new inflation anchor coupled with surging core inflation. We foresee cautious and data-dependent SARB will likely try to bring inflation down to new 3% anchor and assess the impact of earlier cuts before restarting easing cycle, particularly considering current geopolitical uncertainty and upside risks to the inflation outlook prevailing. Thus, SARB will likely halt its cutting cycle Q4. We expect SARB will continue reducing the rates in 2026, -with a slower pace due to global uncertainties-, and cut by 25 bps in each half of 2026. Our end-year key rate predictions remain at 7.0% and 6.5% for 2025 and 2026, respectively, which could also go below 6.5% if the inflation trajectory allows. We believe 3% inflation target could complicate easing in 2026, given our inflation forecast. Political uncertainty, slow reform implementation, and fiscal slippage pose internal risks.Figure 3:&nbsp; SARB Interest Rate Forecast (%), 2018 &ndash; 2027<figure class="image"><img src="https://assets.continuumeconomics.com/storage/uploads/68d0f23e189b1.jpg" style="width:100%;"></figure>Source: SARB Forecast Report (September 2025)South African economy grew modestly by 0.6% on a year-on-year basis in Q2 2025 supported by driven by strong performance in the manufacturing, mining, and trade. The growth momentum continued to be backed by moderate inflation, investor confidence and interest rate cuts.Despite the positive outlook, SARB Governor Kganyago recently highlighted the country&rsquo;s vulnerability to global risks, and noted that dysfunction in administered prices undermines purchasing power and weakens growth. We assess the economy will grow by 1.1% and 1.6% in 2025 and 2026, respectively, buoyed by improved consumer sentiment, no big inflation shocks, more stable electricity supply in Q3, and interest rate cuts; despite the uncertain global environment, geopolitical tensions and slowing global demand being important downside risk factors. Domestic factors such as persistent structural challenges such as unemployment and fiscal strain will continue to temper the outlook.Unemployment remains stubbornly high at around 33% in South Africa which require urgent labor market reforms to unlock inclusive growth. We think continued implementation of Operation Vulindlela reforms - targeting energy, logistics, water, and digital infrastructure &ndash; will also be key to unlocking productivity and competitiveness.TurkiyeDespite decelerated less-than-expected, inflation in Turkiye continues to soften in H2 backed by lagged impacts of the tightening cycle, relative slowdown in credit growth, and tighter fiscal stance. CPI cooled down to 32.9% YoY in August, marking the lowest rate since November 2021 while education and housing prices lead the rise in the index. Despite headline inflation easing, core inflation remains sticky due to structural price pressures in food, housing, and services. We expect softening to continue, but with a slower pace in Q4 while the extent of the&nbsp;decline will be determined by TRY volatility, food inflation, services prices and global developments. (Note: According to a recent announcement, CBRT also expects inflation to stay higher-than-expected in Q4). We think volatile food and energy prices pose upside risks to the inflation trajectory.Despite the CBRT forecasting the annual headline inflation will stand between 25%-29% at the end of 2025, we foresee the annual average headline inflation will hit 34.5% in 2025. (Note: According to CBRT&rsquo;s inflation report dated August 14, CBRT maintained its end year-end inflation forecast at 24% while increasing 2026 forecast to 16% from 12% and end-2027 forecast to 9% from 8%). We anticipate the wage-inflation spiral, deteriorated pricing behavior, stickiness of services inflation, and geopolitical risks will keep inflation pressures alive in 2026. If the Ukraine-Russia war will come to a surprising end, this will be positive for Turkish inflation outlook, while this is not our main scenario.We envisage it will be difficult to grind sticky inflation from 30%s to 10%s rapidly, taking into account that inflation has become stickier and requiring high interest to remain for some time. It appears it would be necessary to make concessions on growth to achieve inflation in the 10&rsquo;s. We anticipate domestic and geopolitical risks will keep inflation pressures alive for a longer period, and it will be unlikely to reach a single digit inflation by 2027.It is worth emphasizing that the arrests of opposition mayors including Istanbul, Adana and Antalya in 2025 continue to risk the disinflationary process due to loss in investor confidence and currency volatility. We feel TRY remains exposed to global risk sentiment and domestic political shifts, while a sudden depreciation could easily reverse disinflation gains. Inflation expectations and pricing behavior remain fragile.We expect a cautious CBRT will continue its cutting cycle in Q4 2025 and 2026 unless there is a sustained surge in the underlying trend of monthly inflation is observed and heightened political instability. Our end year key rate prediction for 2025 and 2026 stand at 37% and 24%, a bit higher than the June outlook due to sticky inflation and given the fact that CBRT halted its easing cycle in Q2 due to risks related to domestic politics. We are of the view that the CBRT will continue cutting rates in 2026 to 24%, but with a slower pace. We expect the monetary easing cycle to support a continued normalization of funding cost towards the policy rate.Another major issue related to CBRT is its creditworthiness. Taking into account that sustained economic recovery hinges on the independence of the CBRT and rule-of-law reforms, we think any backsliding could easily trigger market volatility. There is serious domestic criticism about the credibility of the CBRT since the actual inflation continues to significantly deviate from the CBRT&rsquo;s targets and CBRT&rsquo;s decisions are controlled by the current government, particularly in the last five years, causing CBRT&rsquo;s forward communication to be weak and discredited.Figure 4: CPI, Core Inflation (YoY, % Change) and Policy Rate (%), January 2015 &ndash; December 2025<figure class="image"><img src="https://assets.continuumeconomics.com/storage/uploads/68d0f24970a21.png" style="width:100%;"></figure>Source: Continuum EconomicsWe expect Turkiye&rsquo;s GDP growth to edge down to 3.1% in 2025. We think aggressive monetary policy, high inflation and tighter fiscal stance will continue to moderate household consumption, lending and investments. Growth will remain under pressure in Q4 2025/Q1 2026 due to high interest rates and adverse global outlook. Additionally, adverse geopolitical developments including continuation of Russia-Ukraine conflict and the 15% additional tariffs by the U.S. on Turkiye-origin products are other risks factors.There is still a downside risk that growth can be lower than expected, particularly considering all tightening measures in place. We believe that any unexpected resurgence of inflation, TRY depreciation, or (new) geopolitical tensions could derail recovery and reignite macro instability.2026 growth will be likely be higher than 2025, hitting 3.5% YoY in 2026, likely supported by positive impacts of the rate cuts and increasing business confidence assuming no dramatic impact from weaker external demand. We think a drop in the inflation rate and rate cuts could boost confidence, coupled with accelerated structural reforms, and stable global conditions could lift growth back toward potential of 3.5%-4% after 2027.Figure 5: GDP Growth (%, YoY), Q3 2022 &ndash; Q2 2025<figure class="image"><img src="https://assets.continuumeconomics.com/storage/uploads/68d0f254940f6.png" style="width:100%;"></figure>Source: Continuum EconomicsRussiaRussian economy continues to face structural challenges; from sanctions and supply chain disruptions to demographic decline and fiscal pressures. The war in Ukraine remains determinant for all outlooks as it creates an increasing financial burden and labor constraints on Russia. The overall environment for doing business in and with Russia remains unfavorable.Despite CBR projecting that inflation returns to the 4% target in 2026, headline inflation hit 8.1% YoY in August staying far from the target.&nbsp;(Note: We feel a full-scale peace deal in Ukraine is required for a continued significant inflation slowdown which could lower Russia&rsquo;s military spending and relieve price pressures). Our average inflation predictions are at 9.1% and 6.1% in 2025 and 2026, respectively, as sanctions dominate the economy igniting labor shortages, and supply-chain disruptions. Additionally, there are constant surges in services and food prices, which is worrisome.Despite concerns, inflation moderately edged down in Q3 as previous tight monetary policy affected bank lending and private consumption, and the RUB has shown relative resilience, particularly after June. As noted, high military spending and rising wages do not signal a continued inflation slowdown in the horizon yet, and we believe reaching 4% target will be very tough even in 2026, since cooling off inflation will take longer than the CBR anticipates.Backed by softening inflation, CBR continued its easing cycle in Q3 and reduced&nbsp;the key rate by&nbsp;100 bps to&nbsp;17% per&nbsp;annum on September 12, highlighting inflationary pressures continue to&nbsp;decline. We think CBR will likely resume cutting rates (moderately) in 2026 if the inflation trajectory allows, RUB stabilizes and inflation expectations converge to CBR&rsquo;s forecasts. We decreased our end-year key policy rate from 18.0% to 16.0% when compared with June outlook since CBR started its easing cycle earlier-than-expected after inflation started to soften in Q2. Our 2025 end-year key rate forecasts stand at 16%, and 10.5% for end-2026.The inflation trajectory and rate decisions will depend on how peace negotiations in Ukraine will proceed in Q4 2025/2026.&nbsp; A full-scale peace deal in 2025 is unlikely due to president Putin&rsquo;s stubbornness as he is insisting on his own peace terms. (Note: A peace deal could have helped Russian economy to feel relief since RUB will likely strengthen, average headline inflation will soften, and fiscal pressure will ease, particularly if sanctions will be lifted). The probability of war continuing remains at 70% considering peace negotiations continue to develop very slowly, Putin maintains a hard line stance and there are no significant moves yet by president Trump such as implementation of secondary tariffs on Russia oil buyers.We continue to think Ukraine remains in a weaker negotiating place and, at some point Ukraine will have to admit giving up some land to Russia and stop insisting on joining NATO. Our second scenario is based on a Russia-friendly peace deal (30% probability) with Russia annexing areas in and around&nbsp;four Ukrainian&nbsp;oblasts that it occupied, securing no NATO membership for Ukraine and no foreign troops in Ukrainian territory. &nbsp;Figure 6: CPI, Core Inflation (YoY, % Change) and Policy Rate (%), January 2015 &ndash; September 2025<figure class="image"><img src="https://assets.continuumeconomics.com/storage/uploads/68d0f25f319c4.png" style="width:100%;"></figure>Source: Continuum EconomicsWhen it comes to growth, the main driver for Russian GDP growth remains the surge in military spending, supported by the improved consumer demand amid greater outlays on social support, higher wages and strong fiscal stimulus. Despite sanctions, Russia maintains energy export flows to non-Western markets, particularly China, India, and parts of Africa. Despite these underpinnings, Russia's GDP expanded by&nbsp;1.1%&nbsp;YoY in Q2, partly due to&nbsp;gradual slowdown in&nbsp;domestic demand growth, marking the slowest pace of growth since the economy resumed expansion in Q2 2023.We envisage growth to hit 1.3% and 1.4% in 2025 and 2026, respectively, which are significantly less than 2024 figure, as the aggressive tightening cycle is still feeding through, capacity utilization reached its maximum in years, and labor force deficit is unlikely to change in the short term. More importantly, sanctions, high interest rates, supply side constraints and higher price pressures remain restrictive. It is worth mentioning that population aging and emigration are shrinking the labor force, undermining long-term growth potential in Russia.

·     In South Africa, we foresee average headline inflation will stand at 3.4% and 4.2% in 2025 and 2026, respectively, despite upside risks to infl

September Outlook: Into 2026

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