Deutsche Bank downgrades US 2025 GDP forecast to +0.9%

The world is facing a dollar confidence crisis as the repercussions of “Liberation Day” continue to reverberate, Deutsche Bank says.

The German bank is out with its latest forecasts for the US economy and is increasingly tilting towards a stagflationary scenario.

• 2025 US growth forecast cut to 0.9% (q4/q4), hit by tariffs, policy uncertainty and tighter financial conditions.
• Labor market still resilient but cracks emerging; unemployment to rise to 4.6% this year (4.1% currently)
• Tariffs look set to lead a resurgence in inflation pressures this year. Core PCE inflation now seen ~3.75% end 2025 (~1pp above prior view); risks remain skewed higher.
• Critically, they see US CPI at 3.2% in 2026, endangering rate cuts but forecast a Dec cut and two more in Q1 2026
• China GDP forecast now revised down to 4.5% for 2025, assumes 145% tariffs
• They believe that Xi’s “whatever it takes” fiscal boost will be announced before mid-year.
• Eurozone growth downgraded to 0.5% for 2025
• UK GDP seen at +0.8% vs +1.0% prior, expect Q2 contraction on inventory unwind
• Global growth expected at 2.9% in 2025 (vs 3.2%) and 3.0% in 2026 (vs 3.3%)

Deutsche Bank writes:

This potentially marks the largest shock to the world's financial and trading system since the collapse of Bretton Woods in 1971. Although Trump’s 90-day tariff reprieve and subsequent exceptions have lessened the impact, much damage has already been done thanks to extreme levels of uncertainty around the credibility and direction of policymaking. The US's exorbitant privilege of being able to comfortably fund its twin deficits is perhaps the largest consequence of recent events, and may ultimately determine how far the US administration is able to continue this policy.

I worry that we are underestimating supply chain impacts from a China-US decoupling and launching a repeat of covid-style inflation.

In terms of FX, Deutsche Bank sees EUR/USD rising to 1.15 by year end. They see purchasing power parity in the 1.25-1.30 range.