Slowed down global economy seeks new balance

Slowed down global economy seeks new balance

The global economy’s momentum has noticeably come to a halt: analysts of OTP Bank expect a slowdown in the growth rate both in the United States and the Eurozone. A selective, real return-oriented approach may be the most rewarding for investors for the remainder of the year in a global environment facing so many challenges

Budapest, July 2, 2025 – Annual economic growth in the United States cannot reach 1.5% this year and next year, while in the Eurozone, performance is expected to be even weaker, likely below 1 % annually, according to analysts of OTP Bank in their third quarter investment strategy. Top reasons include the impacts of trade wars and rising geopolitical risks all pointing toward a slowdown.

Mixed inflation picture

According to analysts, upside risks persist, fueled by strong fiscal spending, a tight labor market, and geopolitical tensions in the Middle East. In contrast, a disinflationary trend is in focus in Europe: inflation is approaching target levels and risks are pointing downward.

Interest rate expectations connected with monetary policy also show divergence. This year, the market expects one or two more rate cuts from the European Central Bank, resulting in potentially dropping below the current neutral level.  In contrast, in the United States, two rate cuts are priced in for both 2025 and 2026 - states Gergely Tardos, Head of OTP’s Research Center. At the same time, analysts of OTP Bank warn that inflationary pressures continue to strongly constrain the Federal Reserve’s room for maneuver. Regarding the Euro/Dollar exchange rate: the market is looking up, and investors anticipate a break above the 1.20 level.

Increased risks on the long end of bond markets

According to OTP Bank analysts longer-term yields also mirror the uncertainty in the global economy: yield expectations for 10-year U.S. and German government bonds are trending upward. In global bond markets, risks are clearly concentrated on the long end, and current levels are not particularly attractive so precious metals and equities are increasingly in focus.

Equity market valuations continue to stay above the long-term average, while corporate profit momentum is gradually weakening. „We are close to the end of the profit cycle, as profit margins are already at previous highs. However, without a lasting and deep recession, a major market collapse seems unlikely, and market positioning remains neutral. Due to significant political uncertainties, major rallies may be followed by large waves of selling. We are currently in what we consider to be a fair zone, which justifies neutral equity exposure”– says Dávid Sándor, Head of Multi-Asset Strategies at OTP Global Markets.

Threatening event risks

Events, like the latest Middle East conflict involving Israel and Iran, the naming of the successor to Fed Chair Jerome Powell, or the possible further tightening uncertainty in international markets – each of these could independently trigger significant market fluctuations in the second half of the year.

The regional outlook also shows a mixed picture. Central and Eastern European stock markets – especially the CEE region – may continue to trend upward. The Japanese stock exchange stands out among the developed markets, where corporate reforms and low valuations could especially be attractive. Latin America and South Korea may enjoy greater attention among the emerging markets.

Commodities rally appears slightly fragile

Following the sharp correction after the Trump administration’s tariff announcements at the beginning of April, commodities have made a strong recovery. Behind the spike were the dollar’s weak performance (which traditionally favors commodities) in 2025, as well as the Chinese economy, which continues to do well, despite tariff-related uncertainties.

„Since the global environment is still facing many challenges, the commodities rally appears slightly fragile, which justifies the cautious approach” – says Dávid Sándor. As long as uncertainties persist, a selective, real return-focused strategy remains advisable for investors; it could be the best approach for the remainder of the year.