Global Economic Report – June 18, 2025

Introduction

On June 18, 2025, economic indicators were on the rise throughout the world. The central banks of the U.S., Europe, Canada and Japan were all cautiously positioned in a complicated environment colored by inflation, growing trade tensions, increasing geopolitical risks, and changing consumer and business habits.

In our broadened report we address:

Federal Reserve guidance and economic forecasts

Bank of Canada concerns about tariffs

Comments from the ECB regarding flexibility with Middle East unrest

BOJ tapering cautiously

Recent inflation and retail reports

Keeping our eye on sensitive banking trends

Updated growth outlooks from the OECD and World Bank

Forex markets and impacts

Key risks and potential future policy.

1. Federal Reserve – Steady Path, Patient Tone

The Federal Reserve kept the target range for federal funds the same (4.25–4.50%), which is in-line with expectations, but also directed market expectations lower for fewer cuts in the years 2025–26.

FedHikes Forecasts: Policymakers now expect two less federal funds rate cuts in 2025, down from three cuts previously, with headline inflation showing more stickiness, and potential global risk. Also, the outlook for 2026–27 was extended further out.

Revised Growth & Inflation Expectations: CBO projected 2025 GDP at 1.4% with unemployment projected to go up to 4.5% and inflation was expected to moderate to around 3.0%.

Policy Uncertainty: Chair Powell emphasized being data-dependent, yet warned that more tariffs or uncertainty outside of Brazil could hedge against cuts in rates.

Diverging Views on the FOMC: Half of the voting members still expect two cuts, yet closer to one-quarter now think there will be no further cuts before the end of 2026.

Market Reactions:
U.S. Treasury yields rose modestly, equities traded similar in a rangebound manner throughout, and the U.S. dollar appreciated slightly with trimmed expectations for more rate cuts for 2025.

2. Bank of Canada – Tariff Risks and Trade Diplomacy

In recent comments, Tiff Macklem, Governor of the Bank of Canada (BOC), spoke about the importance of finding a resolution to the U.S.–Canada tariff discussions, and cautioned that aluminum and lumber tariffs caused ongoing inflation and could impede growth. The BOC stated “even dynamic small trade frictions may have ripple effects across sectors like energy and agriculture” (to underline their acknowledgment of the importance of trade friction), The message was no different than those of other central banks that expressed concern that the rise of trade barriers to other countries may limit the ability to change the level of interest rates for an extended period of time.
The Canadian dollar fell marginally in value to the U.S. dollar, not surprising considering the renewed uncertainty around the trade.
3. European Central Bank – Policy flexibility takes centre stage
ECB official Fabio Panetta explained that the consequences of the Israel–Iran war, global trade uncertainty, and energy shocks, mean “policy flexibility” is needed.
Inflation outlook: Inflation has come down but underlying inflationary pressures continue from wages and services.
Future Rate outlook: The ECB is on hold for now, but signaling it is prepared to revisit their tools if core inflation heats up again.

4. Bank of Japan – Gradual Tapering

The BOJ decided to keep the policy rate at 0.5%, but signaled a gradual tapering of its QE program:

Tapering Size: Tapering of bond purchases will be slowed from ¥400bn to ¥200bn a quarter, indicating a gradual shift.

Hawkish-leaning Signal: Ueda indicated that wage growth and inflation data would determine any tightening actions.

Potential Effects on the Forex Market:
This action briefly strengthened the yen with USD/JPY dipping to 144.50 and then settled on a more cautious outlook.

5. Mixed Signals in US Retail & Inflation Data

Core Retail Sales (ex-autos): +0.4% suggesting durable underlying consumer demand.

Headline Retail Sales: Decreased -0.9% – the largest drop in four months. Contributing to this slump was a 3.5% decrease some of which was due to declining auto sales.

Analysis:

Consumer Resilience: The higher core sales rates suggest that consumption remains strong and durable despite stable – although volatile categories.

Auto Sector Impacts: The meaningful weakness appears to be reflective of changing consumer preferences/needs and purchases that were delayed.

Impacts on Central Banks: The Fed could see this as an indication of too much optimism but still not enough to look through the strength of the private sector.

6. Inflation – Oil, Tariffs, and Sticky Services

The global inflation rate has declined to approximately 4–4.5%, from above 6%, early in 2024, but still exceeds most central bank targets.

The risk remains: Services, housing costs and energy costs stay elevated under continuing global pressures.

Transmission of tariffs: Central banks are underscoring, anew, further rounds of tariffs as a source of inflationary risk and to indicate another source of delay in Decision-Making on rate increases.

7. Global growth expectations – downgrades and caution.

World Bank

Revised 2025 growth expectation from 2.6% to 2.3%, noted a “perfect storm” of trade war, energy shocks and high debt in emerging markets.

OECD

Now projects global GDP growth at 2.9% in 2025–26 (down from 3.3%), warning that trade bottlenecks and investment gaps could prolong whatever phase of inflation.

The divergent growth trajectories highlight an uneven global recovery—advanced economies stabilize while emerging economies stall.

8. Banking Indicators of Sensitivity

While observing no prohibited private or regulated personal data, some trends in the bank sector are salient:

Interbank lending spreads have crept higher, indicating tighter financing conditions and risk aversion among borrowers.

Commercial lending growth slowed to 1.2% y/y for May—the slowest pace in six months.

Bank deposit outflows attributable to major North American and European banks are growing at ~0.3% in Q2, illustrating hedging behaviors.

Non-performing loans in EM Asia have ticked up somewhat—yet remain below 3%, with continued vigilance required.

None of these indicators signal a crisis—however, they indicate that credit markets are revealing greater caution. Whether existing monetary constraints tighten even absent a change in the policy rate remains to be seen.

9. Market & Forex Reaction

Currencies:

USD: Slightly stronger due to the more robust core retail sales report and the restrained Fed tone.

JPY: Started to strengthen after BOJ taper announcement but remained volatile.

CAD: Weaker given recent trade risk.

EUR / GBP: Flat. The BOE was cautious, but their tone offset any potential downside.

Bonds:

10‑Year U.S. Treasuries: Yielded 5 bps higher amid concerns about tariffs driving inflation.

Bund Yields: Held steady amid the ECB’s wait-and-see stance.

Commodities:

Oil: Hovered around $87 / bbl to an elevated Middle East risk premium.

Gold: Gained ground followed enhanced risk hedging from rising oil/gold-in.

Copper: Slightly weaker on lower demand from China.

Equities:

U.S. Indices: Flat amid rising commodity cost pressures in cyclical sectors.

European Markets: Tepid as the market awaits signals of stabilisation from the ECB.

10. Risk Factors and Strategic Themes

a. Trade Tariffs

Upcoming US tariffs on July 9 stand as primary risk to inflation overall.

b. Geopolitical Risks

Escalation in the Middle East could push oil to above $90 and increase volatility.

c. Central Bank Divergence

Differentiated polices among the FED, BOJ and the ECB are making it difficult to characterize forex and yield curves.

d. Banks Are On Alert

Credit market stress shows that there can be risky lending practices without openly tighter standards, it’s the risk aversion that holds things back.

e. China Watch

Slowing industrial recovery could spill over to commodity exporters.

11. What’s Next – Policy Event Tracker