Economic backdrop
US
In 2025, investors are learning the cost of macro uncertainty—volatility. While the overall fiscal policy shift could turn out to be a positive supply shock, it must first get through the short-run challenges of sequencing the policy changes (tariff implementation occurs before tax legislation or de-regulation). Thus, the impact so far has been a drag as tariffs weigh on growth, while the stimulative aspect of tax cuts and deregulation are still to come.
Policy aside, the core economy continued to display cooling characteristics. Tight monetary policy is clearly having a negative effect on interest-sensitive sectors (housing and construction come to mind) and aggregate private borrowing. The resulting negative credit impulse removes a key buttress to the consumer and puts the onus on the labor income proxy to fuel spending. Labor income has held up so far, but becomes a key fulcrum for the economic outlook—a continued cooling in labor market would sap labor income, which in turn slows consumption for which there is no private credit growth to offset. The negative income effect of tariffs will only add to this pressure and is a key factor in our below-trend growth forecast.
Inflation remains in the spotlight, with disinflationary demand expected to experience a price-level adjustment due to tariffs. Inflation has clearly been coming off the boil, with a little help from favorable seasonal adjustments. But this will likely change later this year as tariffs start trickling through the price chain. It is worth noting that while tariffs do not result in demand-driven inflation, they can still raise short-term inflation numbers. It is that potential impact on prices that has the Federal Reserve on an elongated rate-cut pause. Powell & Co. want to ensure that the one-time price adjustment doesn’t linger and ignite a continual accelerated pricing environment.
While market expectations of Federal Reserve action have been quite volatile, Aegon Asset Management has been pretty consistent with our view of two quarter-point interest-rate cuts in the latter half of 2025. The tail risks around that view are skewed toward more cuts, given the possibility of a faster economic unwind if the labor markets start to crack. Our base-case scenario predicts below-trend growth with a tail risk of recession.
The political landscape in Washington, D.C., adds another layer of complexity to the economic situation. The government shutdown has been avoided as a continuing resolution funds operations through September 2025. The debt limit was reinstated on January 2, 2025, with an X-date expected around August. The tax bill reconciliation is on pace for pre-August recess passage and will address the looming debt ceiling issue as well.
The overall economic outlook for the rest of 2025 continues to be one of policy transition. The landscape should start to look brighter as the fiscal policy wish list manifests itself into actual policy. That should reduce uncertainty risk and potentially impart a positive supply shock on the economy, but it is more likely a 2026 story than a second half of 2025 one. In addition, a resumption of the rate cutting by the Federal Reserve will likely start to add much needed relief to the interest-sensitive components of the economy and allow for positive private credit creation.
Europe & the United Kingdom
Europe has experienced a prolonged period of sluggish growth. The drag from high energy prices, slow productivity growth and more limited fiscal support have all resulted in a substantially lower growth rate compared to the US.
Currently, the European consumer is in a relatively strong position, characterized by a high savings rate and positive real wage growth, so they have ample room to increase consumption. However, confidence is negatively impacted by the ongoing US trade war. That impact will likely be felt both directly, through higher tariffs on the EU, and indirectly, due to a slowdown in global growth. The EU is a relatively open economy and therefore sensitive to the slowdown in trade.
On the more positive side, the German infrastructure and defense package is anticipated to boost growth, but the main effect will only be felt in 2026. At the same time there are many risks. For instance, it seems unlikely that the war in Ukraine will cease, leading to significant costs and risks for the EU due to a prolonged conflict.
Services inflation has been persistent but is now declining in most countries. Negotiated wage figures are also on the decline and the outlook for future wage growth is much more muted. Tariffs on US goods are expected to only marginally raise inflation. A larger effect is likely to come from the disinflationary impact of Chinese exports directed to the EU market. Slower global growth is another factor that is expected to result in declining inflation. Overall, we expect inflation to fall below the European Central Bank’s (ECB) target levels.
The ECB has delivered its seventh interest rate cut, with market pricing indicating two more cuts by the end of 2025. Meanwhile, the Bank of England kept rates steady at its June meeting, but a rate cut later this summer could still be an option.
Energy has been a major headwind to EU growth due to the reliance on Russian gas and has limited self-sufficiency. High energy prices are expected to remain a drag on growth in the coming years. However, recently, energy prices have declined due to the expected global economic slowdown.
That said, there are several risks that could impact our forecast. They include an escalation in trade conflicts with the US. The direct trade impact is likely to be negative but probably moderate.
Another factor could be the collapse of part of Ukraine’s sovereignty, which would lead to a refugee flow and a hit to confidence, which in turn would likely increase the support for populism.
Also, a renewed escalation of the energy crisis remains the key downside risk for the European economy, particularly for Germany. In addition, political risks are rising with upcoming elections, which could lead to further policy paralysis.
Most risks are on the downside, however there is a more optimistic scenario possible. There could be a period of higher productivity improvement, for example, due to advancements in artificial intelligence. Also, previous reforms have resulted in several countries like Spain and Poland achieving quite impressive growth rates. To get the European average moving, we need Germany and France to start growing more rapidly. Especially in the case of Germany, that could be possible now that the worst of the energy crisis is passed and a looser fiscal policy will be pursued.
Global corporate credit research overview
- Consumer-related companies are responding to cautious consumer spending by maintaining prices to preserve margins, which will likely be more challenging going forward
- Industrial sector companies are being impacted by weakening demand growth, customer affordability and trade and tariff uncertainties
- Financial sector companies benefit from stable borrower/asset credit quality and net interest margins that support earnings
- Leverage ratios for corporate issuers and capital adequacy levels for financial firms remain healthy across most sectors
Geopolitical tensions, tariffs and trade, fiscal and monetary policy, and resulting impacts on inflation and growth, are all contributing to cautiousness on the part of consumers and most corporate sectors and issuers. As a result, we expect moderating but still positive global economic growth in coming quarters. Balance sheets will likely remain healthy, contributing to continued stable credit fundamentals across most sectors.
Wage growth and employment levels continue to support the consumer in developed markets. Consumer credit metrics remain stable including bad debt and overall debt levels. Nonetheless, low-income consumers continue to show signs of stress and middle-income consumers are beginning to adjust their purchasing activity.
Middle-income and higher-end consumers are maintaining their discretionary spending, while continuing their shift away from branded products toward store labels and increasing purchases at bulk retailers and value-oriented retailers.
The luxury sector remains challenged, with more affluent brands faring better than brands targeting aspirational consumers. Consumer companies have held price to protect margins, rather than discounting to maintain volumes, but we are cautious on their ability to further raise prices to counter tariffs.
The global industrial sector also reflects a slower-growth environment, with the focus on cost-cutting and efficiency measures to offset softening demand. Inflation and elevated interest rates are creating affordability challenges for consumers that continue to impact housing and autos. While autos saw some demand pull-forward ahead of tariffs, volumes are now weakening. Producers of basic and intermediate goods are also being impacted by trade uncertainties, factoring into cautiousness by customers in their inventory management and order patterns.
Reduced regulatory burden and tax incentives in the US could be more positive impacts in the intermediate term. We also expect data center buildouts in both the US and Europe will continue to contribute to growth for companies in the technology, construction, natural gas and electric utility sectors, among others.
The financial sector outlook continues to be stable with pockets of known weakness particularly in US office commercial real estate. Net interest income should benefit from lower short-dated deposit rates and higher rates on longer-tenured loans as they reprice. The banking sector globally is well-positioned from an earnings, capital and asset quality perspective.
Leverage ratios remain relatively low across most sectors, as companies have reduced debt. While interest coverage has weakened, relatively high yields drive strong investor demand and relatively easy access to capital for most corporate issuers. The strength in credit metrics is a key element of our overall stable fundamental outlook. Having said that, we remain focused on the aforementioned economic uncertainties, as their impacts on corporate debt issuers become clearer in coming quarters.
Fixed income overview
Fixed income outlook
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Fundamentals |
Valuations |
Technicals |
Sentiment |
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Investment grade credit: EU and UK |
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Investment grade credit: US |
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High yield |
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US bank loans |
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Emerging markets |
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Global sovereign bonds |
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European asset-backed securities |
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US structured finance |
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Distressed debt |
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