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We are now almost half way through the year and it is time to take stock in order to update a set of economic scenarios in which the divergence in the pattern of inflation between the United States and Europe has been key to explaining the adjustment of interest rate forecasts.

What role can central banks play in the fight against climate change? How could the ECB incorporate climate criteria into its decision-making processes, within the framework of its strategic review?

Trump’s decisive victory and the Republican majority in Congress have triggered a significant appreciation of the dollar against its peers (3% in the nominal effective exchange rate) and in particular against the euro (4% cumulative appreciation between 5 and 26 November). The scope of the policies announced during the campaign affects the outlook for the euro-dollar exchange rate, which we review in this article.

The inflation rebound of the last two years has led the Bank of Japan to rethink its monetary policy and abandon yield curve control (YCC), the implications of which we discuss below.

The intensification of inflationary pressures, a phenomenon aggravated by the war in Ukraine, has led to a sharp shift in the direction of monetary policy. Mass bond purchases by the central banks are being left behind, while official rates are already being ratcheted up. In the financial markets, this change has been reflected in a sharp rise in sovereign debt yields – a trend which, due to their role as a benchmark, has also affected other financial assets.

The global economy demonstrated notable resilience during 2025, providing a good starting point for 2026, such that the global economy could continue to grow at a rate of around 3%, with globally stable inflation. However, the risks to the baseline global scenarios have increased significantly following the joint US and Israeli attack on Iran, which has triggered a surge in oil and gas prices and turmoil in the financial markets. 

Trade protectionism has been part of the new geopolitical normal for years now, but it has reached its peak in 2025 with the new US administration. In this more hostile environment and in the absence of an effective multilateral forum, the EU continues to make efforts to broaden its economic relations with different regions of the world. The strategy of diversification has become a valuable tool, not only in the search for markets with high export growth potential, but also in making progress towards the desired strategic autonomy.

We outline the main factors that will dominate the macroeconomic scenario in the coming months and we update our forecasts. In 2023, we expect GDP to grow by 1.3% and the inflation rate, still high, to stand at an annual average of 4.2%. Employment will continue to grow, albeit at more modest rates, and we expect the housing market to slow during the course of the year, with no sharp corrections. The budget deficit will remain at around 4% of GDP, the same level as we project for 2022.

The return of tariffs as a central tool of US economic policy has marked a turning point in 2025. One of the explicit objectives of the White House’s new tariff strategy is to reduce the persistent trade deficit in goods. However, far from producing an orderly reduction, the succession of announcements and the irregular implementation of tariffs have generated significant distortions in trade flows, especially in imports. In this context, the data available to date does not yet show any clear change in the trade deficit. However, these distortions are indeed leaving a mark on the composition of imports by geographical origin. Below, we analyse how the country’s various trading partners have reacted and we provide an overview of these changes.

The resilience shown by the international economy at the aggregate level, which is quite remarkable given the significant geopolitical uncertainty and restrictive financial conditions dominating the scenario, reflects disparate dynamics among the various international economies, with each one seeking to make an orderly landing amidst their own challenges. The US is experiencing strong growth and is seeking to normalise towards more sustainable rates, while the euro area is showing signs of less apathetic growth and China maintains mixed dynamics between industry and domestic demand.

With disinflation on track and some signs of a slowdown in economic activity and a cooling of the labour market, monetary policy is shifting gears and starting to dial back the monetary tightening of the past years: going from restrictive to neutral. The ECB and the Fed, along with other major central banks, have initiated this easing process with interest rate cuts, and they are expected to continue doing so in 2025. From there, we will seek to clarify the factors that will guide this new phase of monetary policy.

In many developed economies, housing prices have been rising significantly for years – a trend which only accelerated during the pandemic. However, some of those housing markets have begun to experience a correction in the current context of higher interest rates and an erosion of household real disposable income.

In March, the bulk of the published indicators reiterated a picture of reduced weakness in the economic activity figures and greater inertia in core price pressures. However, the collapse of Silicon Valley Bank triggered an episode of financial turbulence and highlighted that the rapid and sharp rate hikes by the central banks are leading to tighter financial conditions.

In these liquid times we are living in – in which a moderately stable economic and political environment has given way to a changing, unpredictable reality subject to continuous transformation – from time to time it is necessary to pause and reflect on the key trends for the near future. That is what we try to do every November in our Dossier on the annual outlook.

The risk of overheating in the US economy has increased due to the latest and significant fiscal spending measures and the bottlenecks that are beginning to emerge in many sectors, in a context of strong recovery in economic activity. Unlike the US, in Europe the risk of inflation being persistently higher than expected is lower. Furthermore, we believe the ECB would take the necessary steps to moderate the effect that a potential rate hike in the US would have on the European yield curve.

Until not long ago, the financial markets had seemed to digest with relative ease the heavy dose of monetary tightening that the central banks have introduced to curb inflation. However, with interest rates increasingly entering restrictive territory – that is, at levels that should cool the economy – the risk of stress events and financial turbulence increases.

The US economy is facing 2026 with a mix of strength and vulnerability. The resilience demonstrated in 2025 has exceeded expectations, and investment in AI, the fiscal stimulus and new rate cuts predict another year of strong growth. Nevertheless, the picture is not free from risks.

Having overcome the crisis triggered by the pandemic, which caused debt-to-GDP levels to skyrocket, debt ratios have now resumed the downward trajectory they were on prior to COVID. In particular, in the private sector, both businesses and households already have lower levels of debt than before the pandemic and much lower than they had during the financial crisis of 2008. All this, together with the greater weight of fixed-rate debt, puts them in a less vulnerable position to cope with the rise in interest rates.

The 20 economies that make up the Euro area have a single currency with a common monetary policy and, implicitly, a fixed exchange rate. However, in the last two years the region has suffered significant discrepancies in the inflation rates of its member countries. What is behind this dispersion?