July 18, 2025
Macroeconomic Outlook: Cautious Optimism
Market Review and Q3 Outlook
KEY SUMMARY POINTS
- Easing trade tensions reduce downside risks, but geopolitical and policy instability continue to cloud the outlook.
- The U.S. economy is slowing but not stalling. Canada faces near-term challenges, but a resolution in trade tensions and fiscal support offer medium-term upside.
- China may utilize targeted stimulus if needed to meet its growth goals, while Germany has already announced fiscal measures that will support economic activity.
As we enter the second half of 2025, the global economy is navigating a complex crosscurrent of easing trade tensions, targeted fiscal expansion, and resurgent geopolitical risk. While fears of a deep global slowdown have moderated, the macro landscape remains highly policy-dependent, with investment opportunities increasingly differentiated across regions.
In the U.S., recent data suggest the economy is slowing but not stalling. Economic activity has been buoyed by front-loaded consumer and business spending ahead of tariffs, masking some underlying softening. Over time, this softening is expected to surface in the labour market and should open the door for rate cuts later this year, provided inflation remains contained.
Moreover, focus is shifting to the pro-growth components of the Trump administration’s agenda, deregulation and fiscal expansion. While the scale and timing remain uncertain, these market-friendly policies, combined with a notable stabilization in both business and consumer sentiment, support a constructive, albeit cautious, outlook for the second half of the year.
In Canada, final domestic demand, which represents consumption, housing, and business investment, has stalled after showing momentum in late 2024. While growth is likely to remain sluggish in the near term, Canada has so far avoided the worst-case outcome, thanks to largely tariff-free access to the U.S. under continued use of the USMCA agreement. Furthermore, negotiations with the U.S. are ongoing, and any meaningful breakthrough or further easing of trade tensions could unleash pent-up demand, representing significant upside potential to Canada’s growth trajectory.
This has kept the Bank of Canada on the sidelines in Q2, particularly given the bank’s preferred core measures of inflation, CPI-trim and median, have picked up in recent months. Fiscal stimulus from federal and provincial governments could also lead to a resurgence of growth and pose additional upside risks to inflation later this year and into 2026.
In Europe, economic growth is gradually reaccelerating. While the European Central Bank is likely approaching the end of its easing cycle, fiscal policy is finally set to take the baton. One example is Germany’s newly announced infrastructure and defence spending plans. Indeed, these measures are well-positioned to bolster economic growth across the euro area, provided they are effectively implemented and supported by a stable global economic backdrop.
China’s economy remains broadly on track to meet its 5% growth target for 2025, though recent softness in Q2 data has introduced some uncertainty around the outlook. Domestic demand, particularly within the real estate sector, continues to exhibit subdued activity. But the manufacturing and external sectors have held up, in part due to trade diversion that has helped offset weaker direct exports to the U.S. Ultimately, despite any near-term softness, policymakers retain the flexibility to deploy necessary stimulus measures as needed to ensure the annual growth target is achieved.
Globally, the escalation in geopolitical risk, most notably in the Middle East, has created an added layer of uncertainty. Energy prices remain sensitive to supply disruptions, and the geopolitical premium in commodity-linked assets has re-emerged.
Taken together, the macro backdrop for the third quarter is defined by divergence. The U.S. appears to be charting a soft-landing path, bolstered by deregulation and the potential for rate cuts. Canadian growth is likely to remain sluggish near-term, but progress on the trade policy front coupled with new government spending offer medium-term upside. Europe’s pivot toward fiscal policy, and China’s policy flexibility, round out a global picture that is no longer synchronized but is not stalling either.
Collectively, these factors suggest a cautiously constructive outlook for global growth in the second half of the year, contingent on policy clarity and effective implementation.
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About the Author
Neil Shankar is CI Global Asset Management’s Economist, responsible for monitoring key macroeconomic trends and shaping CI GAM’s economic outlook. He actively participates in investment and asset allocation discussions, helping guide decision-making.
A leading contributor to CI GAM’s Capital Insights publication, Neil shares in-depth perspectives on evolving economic conditions. He also frequently engages with stakeholders throughout the organization and externally, helping to deepen understanding of the economic landscape. He is regularly quoted in the press for his views on the economy and markets.
With over 10 years of industry experience, Neil joined CI GAM in 2024 after holding similar roles at other major Canadian financial institutions. Neil holds an MA in Business Economics from Wilfrid Laurier University and a BA (Honours) in Economics from The University of Western Ontario.
About the Author
Lorne Gavsie is Senior Vice-President and Head of Macroeconomic & FX Strategy at CI Global Asset Management. In his role, he is responsible for leading a dedicated macroeconomic and FX effort, harnessing the global expertise and knowledge across CI GAM, producing insights to be leveraged for investment purposes and providing our clients with timely and valuable insights. He is also responsible for CI GAM’s currency overlay and hedging strategies. Lorne brings over 25 years of experience in the industry, specializing in currencies, trading and global markets.
Prior to joining CI GAM in 2015, Lorne held various roles with major Canadian banks including Managing Director, FX Europe based in London, England and Global Head, E-FX based in Toronto.
Lorne holds an MBA from the London School of Economics & Politics, HEC Paris and NYU Stern (collectively known as TRIUM) and is a member of the Bank of Canada’s Canadian Foreign Exchange Committee (CFEC).
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