Global Economic Outlook, December 2025

December 2025 finds the global economy in a slow-growth, disinflationary phase, with the U.S. and Japan still relatively resilient while Europe, the UK, China and key emerging markets face softer demand. This outlook reviews the latest data, policy shifts and market risks shaping 2026.

USA

December supposed to conform that US economy moves towards a controlled slowdown, not a recession—an economy finding a new equilibrium as inflation cools, growth eases, and the Fed navigates a careful policy pivot.

U.S. Economic Review – November 2025

The U.S. economy ended November 2025 broadly aligned with a soft-landing trajectory—growth remained solid, inflation continued easing, and the labor market cooled without breaking. Yet the month also revealed widening pockets of fragility, including weak manufacturing, cautious consumers, and persistent housing constraints. Financial markets were highly volatile as shifting data and inconsistent Fed messaging repeatedly reset expectations for a December rate cut and the 2026 policy path.

Growth held above trend, with the Atlanta Fed GDPNow tracking around 3.9–4.0% for Q4. Services continued to outperform: S&P Global’s Services PMI stayed near 55, while ISM Non-Manufacturing remained in expansion at 52.4. Manufacturing, however, stayed in contraction. ISM Manufacturing posted 48.7, new orders were weak, and regional Fed surveys—especially Chicago, Richmond, and Dallas—remained negative. Only New York showed temporary improvement. Hard data such as factory orders and core durable goods showed modest growth, construction spending ticked up, and the trade deficit narrowed, underscoring solid foreign demand. Overall, the economy displayed a clear two-speed pattern: services strong, goods and industry soft.

The labor market cooled gradually. Monthly payroll gains hovered near +120K, driven mainly by private hiring, while manufacturing jobs slipped. The unemployment rate edged up to roughly 4.4%, and participation improved to around 62.4%, indicating returning workers despite slower job creation. Jobless claims rose into the low-230Ks, continuing claims neared 2 million, and wage growth decelerated to about 0.2% MoM or 3.8% YoY—levels consistent with the Fed’s inflation goal. Conditions were softer, but far from recessionary.

Consumers showed resilience but growing caution. Retail sales slowed to about 0.2% MoM, and core components weakened. Still, high-frequency indicators like Redbook sales near 6% YoY signaled ongoing nominal demand, supported by strong earnings at value retailers. Sentiment deteriorated sharply: Conference Board confidence fell into the high-80s, while University of Michigan sentiment slid toward the low-50s. Credit usage rose by roughly $13B, suggesting households are leaning more on borrowing as real income momentum softens.

Housing remained constrained by high rates, though with hints of stabilization. Home price growth slowed materially, with FHFA flat on the month and Case-Shiller barely positive. Pending home sales unexpectedly rose nearly 2% MoM, but builder sentiment stayed deeply pessimistic. Mortgage rates near 6.3–6.4% kept demand subdued, though not collapsing.

Disinflation gained traction. Core PPI rose only 0.1% MoM, headline PPI hovered around 2.7% YoY, and survey-based inflation expectations drifted lower. Combined with moderating wage growth, November reinforced a steady return toward the Fed’s 2% target.

Fiscal dynamics highlighted large structural deficits, with October’s federal deficit widening to about –$280B. Still, Treasury funding remained smooth as strong domestic and foreign demand kept yields stable: front-end yields eased slightly, while long-dated auctions cleared at healthy bid ratios.

In markets, commodities and crypto swung sharply with Fed repricing. Gold hit record highs above $4,100/oz, oil traded in a broad range on mixed fundamental signals, and crypto sold off as ETF outflows intensified.

Overall, November confirmed a still-intact soft landing—resilient but uneven growth, cooling but healthy labor markets, and steady disinflation. Risks remain, but the baseline heading into 2026 is continued moderate expansion.

U.S. Economic Outlook – December 2025

The U.S. enters December with an economy that is clearly shifting gears. After a strong rebound earlier in 2025, growth is now slowing as tighter financial conditions, softer hiring, and more cautious consumers weigh on momentum. The second quarter expanded solidly in the upper-3% range, but the third quarter cooled toward the 2–3% area, and most forecasts now expect fourth-quarter GDP to slip close to 1% annualized. The government shutdown earlier in the fall contributed to the slowdown. Overall, the economy remains resilient, yet December marks a turn from above-trend activity toward a more subdued phase.

Inflation continues to ease but remains above the Federal Reserve’s 2% target. Headline CPI is hovering near 3% year-over-year, with core CPI also close to 3%. PCE inflation is trending in the high-2.5% range. Monthly price increases have moderated, and underlying pressures in goods, shelter, and services have softened, although progress has slowed in recent months. Disinflation is still intact—but it is happening more gradually.

The labor market is cooling in a controlled manner. Job gains have slowed to around 120,000 per month, the unemployment rate has drifted toward 4.4%, and measures of labor demand—openings, quits, and wage growth—have all eased. While layoffs are not widespread, companies are clearly becoming more cautious, especially in tech, finance, and logistics. The market is normalizing after several years of severe tightness, but it remains fundamentally stable. The AI effect is improving the current employees’ productivity rather than firing or hiring new employees, which can be another reason for slowing labor market.

Consumer spending, the backbone of the economy, is losing some steam but remains positive. Retail sales have grown modestly, around 0.2% month-over-month, as households grow more selectively in discretionary purchases. Services spending is still healthy, supported by travel and healthcare demand, though overall confidence has softened. Higher borrowing costs and tighter budgets are slowing the pace of consumption heading into year-end.

Policy-wise, the Federal Reserve has already cut interest rates twice this year and ended its balance-sheet runoff. The policy rate now sits around 3.75–4.00%. The Fed is divided heading into December: some policymakers believe another cut would guard against a sharper slowdown, while others want to see more evidence of disinflation before easing again. Markets reflect this uncertainty, pricing only a modest chance of a December cut. According to CME Group FedWatch Tools, there is now more than 85% chance for rate cut, which I believe can be one of Fed mistakes if they cut, as inflation is still higher than expected, almost at the same levels of most employees’ income growth, while economic growth and labor markets are still at acceptable levels.

Financial markets mirror this mixed backdrop. The S&P 500 and Dow have continued to rise, driven by strong tech earnings and expectations of easier policy, while the NASDAQ experienced a brief pullback. Bond yields hover near 4.0%, and investor sentiment is cautiously optimistic.

As in economic Calendar, the most important event of the month for sure will be nothing but FOMC monetary policy meeting. We will have the personal income and spending data on December 5, before Fed meeting, but NFP numbers will be our few days after fed meeting on December 16.

Other Economic data to watch will be

• Monday, December 1: PMI’s
• Wednesday, December 10: Inflation numbers
• Wednesday, December 17: Retail Sales data
• Thursday, December 18: October Inflation

UK

The UK economy enters December 2025 facing a mix of moderate growth, easing but still elevated inflation, and a visibly cooling labour market. These dynamics have strengthened expectations that the Bank of England will begin cutting interest rates, with several major data releases this month set to confirm whether the economic slowdown is unfolding as forecast.

UK Economic Review – November 2025

The UK economy ended November 2025 looking like a low-growth, disinflationary economy rather than an overheating one. Inflation is falling, but largely because demand is weak, retail sales are under pressure, housing is fragile and both services and industry are losing momentum. At the same time, fiscal policy has become more restrictive as Chancellor Rachel Reeves unveiled a tax-heavy consolidation budget, even while the labour market and business investment are already cooling. Despite the domestic gloom, sterling held up relatively well, helped by a softer U.S. dollar and improved perceptions of UK fiscal credibility. Markets and policymakers are now focused less on further rate hikes and more on the timing of cuts in 2025.

Growth data show the UK expanding at stall speed. Q3 GDP grew by just 0.1% quarter-on-quarter and 1.3% year-on-year, while monthly GDP for September slipped 0.1%. Services output rose only marginally, and PMIs weakened throughout the month, with the composite index barely above 50 and services slowing sharply. Manufacturing is technically back in very mild expansion, but output and orders remain weak, echoed by deeply negative CBI industrial orders and outright contractions in industrial and manufacturing production. Construction is another drag, with PMIs deep in contraction and only minimal gains in official output data.

The labour market is clearly loosening. Unemployment has risen to 5.0%, employment is falling at the margin, and the claimant count is rising. Wage growth has cooled to the mid-4% range, easing domestic inflation pressure but exposing households to real income strains. A small improvement in productivity is welcome, but not yet a structural trend.

Consumers are under visible pressure. Official retail sales badly undershot expectations, with broad-based monthly declines in both headline and core measures. Survey data from retailers and consumer confidence indices confirm weakening demand and persistent concern over living costs, job security and the outlook. Auto demand is volatile but underlying momentum is soft, reflecting tighter credit conditions and squeezed disposable incomes.

Inflation is, however, clearly moving lower. Headline and core CPI, PPI and RPI have all eased, and monthly prints are consistent with further gradual disinflation rather than renewed price acceleration. This, combined with weak activity, effectively ends the case for additional Bank of England tightening. The Bank Rate has been held at 4.0%, and the close MPC vote shows internal pressure is building to begin an easing cycle in 2025.

Housing and credit remain significant headwinds, with high mortgage rates, falling asking prices and constrained activity. Public finances are still stretched, but Reeves’ tax-heavy budget has improved market confidence, keeping gilt auctions orderly and supporting sterling. Overall, the UK enters 2026 as a low-growth, disinflationary economy with narrow policy space and rising risks from weak demand rather than stubborn inflation.

UK Economic Outlook — December 2025

Economic growth in 2025 is projected at around 1.5%, supported by government spending and stronger momentum in the first half of the year. However, forecasters expect growth to weaken in 2026, with projections ranging from 0.9% to 1.4%, reflecting the drag from tighter fiscal policy and subdued global conditions. Despite the slowdown, the economy has avoided recession, but forward-looking indicators point to softer business activity and declining consumer demand.

Inflation remains above target but has clearly passed its peak. Consumer price inflation is expected to average approximately 3.5% in 2025, having reached about 3.8% in September. In October CPI fell to 3.6%. Both official and private forecasts anticipate a gradual decline toward the 2% target by mid-2027, helped by base effects, normalizing energy prices, and restrictive monetary policy. Inflation is expected to fall to roughly 2.5% in 2026, though services inflation remains a lingering concern.

Labour-market conditions have weakened meaningfully. Unemployment averaged around 4.8% in 2025, with data for July–September showing a rise to 5.0%, equivalent to 1.79 million people. Vacancies have steadily declined, payrolled employment has softened, and wage growth has begun to cool—signs of increasing slack. Although real wages are now growing due to easing inflation, hiring intentions across sectors have moderated, suggesting further softening in 2026, when unemployment is projected to reach around 4.9%.

Monetary policy is now at a turning point. The Bank of England held interest rates at 4% in early November but is widely expected to cut rates by 25 basis points to 3.75% at the 18 December meeting, after two meetings of holding the current rate, following the August 25-bps cut. Markets are pricing in additional easing through 2026, potentially taking the Bank Rate to around 3.25% by year-end, contingent on the pace of disinflation and labour-market developments.

The fiscal landscape has shifted modestly following the Autumn Budget. Public borrowing is projected to fall from 4.5% of GDP in 2025–26 to 1.9% by 2030–31, supported by revenue-raising measures. However, elevated inflation continues to place upward pressure on the debt ratio, expected to remain near 83% of GDP. Structural indicators, including employment levels and real wages, highlight a labour market transition from tight to balanced.

Several key releases in December will shape the near-term outlook. Labour-market data on 16 December, inflation figures on 17 December, the MPC policy decision on 18 December, and the Q4 GDP estimate on 22 December will collectively signal whether the UK is on track for a gentle slowdown or a more pronounced deceleration.

In financial markets, expectations of rate cuts dominate. Gilt yields have fallen to around 4.45%, and analysts expect them to stabilize near 4.2% next year. Sterling remains vulnerable following a nearly 9% decline in 2024, and further easing could weigh on the currency. Equity markets show cautious optimism: the FTSE 100 may benefit from low valuations, global exposure, and strong dividend yields, although upside is expected to be moderate and dependent on global risk sentiment.

EU

December 2025 is expected to be a decisive month for EU economic governance. With inflation near target and growth holding steady, the region appears to have engineered a soft landing, though risks from geopolitics, fiscal policy and external trade remain.

EU Economic Review – November 2025

The Euro Area closed November 2025 in a classic low-growth, disinflationary setting. Headline and core inflation continued to drift lower, labour markets remained broadly stable, and the external sector remained a key source of resilience. However, the recovery is clearly two-speed: services and external trade are holding up growth, while manufacturing and construction—especially in Germany—remain notable weak spots. For the ECB, the message is that the hiking phase is over, disinflation is proceeding in an orderly way, and the focus is shifting from “how tight?” to “how long?” before rate cuts begin in 2025.

Growth and activity are modest but positive. Euro Area GDP grew 0.2% QoQ and 1.4% YoY in Q3, a mild upside-price but still low momentum. Germany is effectively stagnant, with flat quarterly GDP, very weak retail sales and subdued domestic demand. France is doing somewhat better, supported by modest consumption helped by very low inflation. Italy stands out on the industrial side, with improving industrial turnover and solid trade surpluses, particularly with non-EU partners. Spain is still expanding but showing cooling signals as retail growth slows and its current account surplus narrows. PMI surveys confirm this two-speed setup: services are in comfortable expansion, manufacturing is back in mild contraction, and construction is a clear drag across major economies.

Labour markets are stable but no longer improving. Euro Area employment is still edging higher, but at a very modest pace. German unemployment is steady with only small increases in jobless numbers, while French payrolls have flattened and jobseekers are rising. Overall, labour conditions remain reasonably tight by historical standards, but the trend has shifted from tightening to sideways or slightly softer, consistent with weak retail and fading business confidence. This helps the disinflation process without yet triggering a sharp rise in unemployment.

Consumers are cautious, not collapsing. Euro Area retail sales are broadly flat month-on-month, with only modest annual growth. German households are clearly retrenching, French consumers are more resilient, and Spanish demand is decelerating. Confidence indicators remain below neutral: the European Commission’s sentiment index sits below 100, and consumer confidence is firmly negative. Business surveys such as Germany’s Ifo and GfK, and Spanish and French sentiment indicators, all point to a wary private sector and household sector.

Inflation dynamics are increasingly benign. Headline Eurozone CPI is near 2.1% YoY, with core around 2.4–2.5%, both easing gradually. Wage growth, as measured by the labour cost index, is cooling at the margin, consistent with further disinflation ahead. Germany shows low but positive inflation, France is close to price stagnation with negative PPI, and Italy is near target, while Spain remains slightly higher but stable. Producer prices and import prices are flat to negative, indicating subdued pipeline pressures rather than deflation.

The external sector is one of the bloc’s strongest supports. Large current account and trade surpluses, helped by lower energy import bills and competitive exports, provide a buffer against weak domestic demand and support the euro.

Credit and sovereign markets reflect tight but functional conditions. Money and loan growth are slow but positive, pointing to restrictive yet not broken transmission. Core and peripheral bond markets remain calm, with no major signs of fragmentation or stress.

Overall, the Euro Area enters December as a low-growth, low-inflation economy with structural weaknesses in industry and construction, but solid external finances and an ECB that can afford to be patient and gradually pivot toward easing if growth stays subdued and disinflation continues.

EU Economic Outlook – December 2025

The EU enters December 2025 with moderating inflation, modest but stable growth, and a monetary-policy stance that has shifted to neutral after more than a year of easing. According to the European Commission’s Autumn 2025 forecasts, EU GDP is expected to grow 1.4% in both 2025 and 2026, rising slightly to 1.5% in 2027. Growth in the euro area is projected at 1.3% in 2025 before slowing to 1.2% in 2026 and improving to 1.4% in 2027. Inflation continues to ease toward the European Central Bank’s (ECB) 2% target, with euro-area headline inflation forecast at 2.1% in 2025 and near 2% through 2026–27. Labour markets remain strong, with EU unemployment stable at 5.9% in 2025–26 and improving modestly thereafter; euro-area unemployment is expected to fall from 6.3% in 2025 to 6.1% in 2027.

ECB staff projections reinforce the picture of a soft landing: HICP inflation is expected to average 2.1% in 2025, dip to 1.7% in 2026 and edge up to 1.9% in 2027. Growth is expected to be muted in the near term, gradually rising to around 1.3% by 2027. This combination of moderate growth, normalizing inflation and resilient labour markets has reduced recession risk significantly.

December brings several important economic releases and institutional events. The euro-area HICP flash estimate for November will be published on 2 December, offering a timely view of the inflation trend. Final HICP data for November follows on 17 December, alongside regular Eurostat updates on unemployment and industrial production. Flash PMIs will also provide an early signal of December’s economic activity.

On 1 December, EU defense ministers meet for the Foreign Affairs Council (Defense) to discuss continued military support for Ukraine and wider defense readiness. On 2 December, the EU–Armenia Partnership Council reviews CEPA implementation, reforms, energy cooperation and regional geopolitical issues. The ECOFIN meeting on 12 December will focus on major files including customs reform, legislation for the digital euro, taxation, the 2026 European Semester and changes to national Recovery & Resilience plans. The General Affairs Council meets on 16 December to prepare the December leaders’ summit. On 18–19 December, the European Council will set legislative priorities for 2026, covering major topics such as the EU–U.S. trade relationship, energy security, the budget and enlargement.

The ECB’s final monetary-policy meeting of the year takes place on 18 December. Markets expect rates to remain unchanged, with the deposit facility at 2% and the main refinancing rate at 2.15%. Money markets and analysts anticipate no further cuts in 2025, and only a limited possibility of a small move in 2026. Stable policy rates and moderating inflation support demand for euro-area bonds, although fiscal expansion in Germany and France may put upward pressure on yields.

 Inflation moderation, easing energy prices and slower wage growth are helping core inflation fall closer to target. The euro remains stable around USD 1.14–1.17, influenced by U.S. monetary policy, tariff dynamics and geopolitical risk. European equities have rallied on rate-cut expectations and resilient earnings, though political and fiscal uncertainty—particularly in France—could introduce volatility.

China

By December 2025, China’s economy appears to be cooling but stable. Growth has slowed, domestic demand is soft, and deflationary pressures persist. Policymakers are expected to maintain accommodative monetary policy and introduce additional fiscal support during the December CEWC. Key uncertainties for 2026 include whether growth stabilizes, whether deflation eases, and how Beijing navigates renewed trade tensions.

China Economic Review – November 2025

China closed November 2025 with a recovery that is losing momentum under the weight of weak domestic demand, a deep property downturn, and sharply slowing credit creation. While external buffers such as a large trade surplus and high FX reserves remain strong, the internal economy looks increasingly fragile. Industrial output, investment, retail demand, and private-sector confidence all softened, and the financial system continues to feel the strain of property-sector stress. Policy remains supportive yet cautious, constrained by currency stability concerns, real-estate risks, and subdued foreign investor sentiment.

Growth and activity indicators show broad deceleration. Industrial production rose 4.9% YoY in October, below expectations and slowing from prior months, while year-to-date growth softened to 6.1%. Retail sales grew just 2.9% YoY, with year-to-date spending slowing further, reflecting subdued consumption in autos, household goods and discretionary sectors. Caixin PMIs remained modestly expansionary, with manufacturing at 50.6 and services at 52.6, but overall momentum is weakening. Services continue to carry the economy, while manufacturing loses steam and confidence remains fragile.

Profits and investment have weakened further. Industrial profits through October rose only 1.9%, down from 3.2%, reflecting margin pressure from soft demand, deflationary factory-gate prices and property spillovers. Fixed-asset investment fell 1.7% YoY, one of the weakest readings of the year, driven by collapsing property investment, reduced local-government infrastructure spending, and subdued private-sector capex amid regulatory, financial and demand uncertainties. Together, weakening profits and contracting investment signal a deteriorating capex cycle that threatens future growth capacity.

The property sector remains the largest structural drag. New home prices are down about 2.2% YoY, especially in lower-tier cities. Developers continue to struggle with liquidity stress, and pre-sales remain weak. Confidence suffered another major blow when S&P downgraded China Vanke to CCC-, sparking a sell-off in its bonds and raising concerns over financial-sector exposure, project completion risk and local-government financing. The property slump continues to weigh on investment, household confidence and broader financial stability.

Credit and financing conditions worsened significantly. New bank loans in October were just CNY 220B—less than half expectations—while Total Social Financing collapsed to CNY 810B. Loan growth slowed to 6.5% YoY. The data show poor appetite for borrowing, cautious bank lending, and restrained local-government financing. The PBoC kept LPRs unchanged at 3.00% (1-yr) and 3.50% (5-yr), choosing targeted rather than aggressive easing to avoid yuan pressure and capital outflows.

Inflation remained extremely mild. CPI returned to positive territory at 0.2% YoY, helped by seasonal demand, while PPI stayed deeply negative at –2.1% YoY, underscoring weak industrial pricing power and excess capacity. The ongoing combination of low CPI and negative PPI highlights demand weakness rather than overheating risks.

Labour and sentiment data suggest that stability on the surface—surveyed unemployment is 5.1%—but underlying stress persists, particularly among youth and construction workers. Consumer sentiment declined, reflecting anxiety about jobs, income, and property values.

Externally, China retains strong buffers: a wide trade surplus (~$90B), modestly rising imports, and FX reserves of $3.34T. Tactical U.S.–China trade cooperation mildly improved sentiment. The yuan benefited early in the month from dollar weakness but faced mild depreciation pressure later.

Financial markets remained under pressure. Chinese equities underperformed regional peers, foreign direct investment fell over 10% YoY, and geopolitical tensions—including frictions with Japan—added to the regional risk premium.

Overall, China in November 2025 is experiencing fragile stabilization rather than genuine recovery. Soft growth, falling investment, ongoing property stress and weak credit creation continue to weigh on domestic momentum. External strength and cautious policy support are preventing a sharper downturn, but a durable rebound will likely require more decisive fiscal, financial and structural action.

China Economic Outlook – December 2025

China enters December 2025 with an economy that is cooling but broadly stable, shaped by moderating growth, soft domestic demand, persistent deflationary pressures, and cautious yet supportive policymaking. Real GDP grew 4.8% y/y in Q3 2025—still close to the government’s “around 5%” target but the slowest pace in a year. Nominal GDP growth eased to 3.7% y/y, reflecting weak pricing power. While high-tech manufacturing, advanced services, and e-commerce continue to drive structural growth—supported by strong output in industrial robots, 3D printers, and new-energy vehicles—traditional sectors such as real estate, consumer durables, and private investment remain under strain.

External demand continues to serve as a stabilizer specially for October and December, as New Year sales supposed to increase international demand and China export.

However, as recent data as mentioned above showing slowing economic growth, it is expected that policymakers to keep monetary and fiscal policy supportive but measured. The December Central Economic Work Conference (CEWC) will be the most important policy event of the month, expected to reaffirm a 5% growth target for 2026, maintain a proactive fiscal stance, and outline new measures for stabilizing demand, supporting advanced manufacturing, and managing financial risks. Prior guidance indicated potential RRR cuts of 50–100 bp, moderate loan prime rate adjustments, and a fiscal deficit ratio near 4% of GDP—with expanded issuance of long-term bonds to support local-government financing and key investment projects.

Credit growth remains subdued due to bank caution around local-government debt, making December’s credit and social-financing data important for evaluating the effectiveness of targeted support for SMEs and property developers. Industrial production, retail sales, and fixed-asset investment data—released mid-December—will be key to determining whether the economy is stabilizing or losing further steam. Retail sales have slowed for five consecutive months, rising only 2.9% y/y in October, while fixed-asset investment is down 1.7% YTD due to property-sector weakness.

For markets, global institutions project 2025 GDP growth between 4.0% and 4.8%, with inflation forecasts ranging from 0% to 0.8%. Deflation remains the primary macro risk entering 2026. Currency forecasts diverge some expect USD/CNY around 7.10 by end-2025, while bearish scenarios place it at 7.5–7.6 due to tariff risks and capital outflows. Equity forecasts range from moderate gains in the CSI 300 and MSCI China (4–10% upside) to caution under higher-tariff scenarios. Bond yields are expected to gradually rise toward 2%, assuming sentiment improves.

Overall, December 2025 is likely to confirm a soft-landing trajectory—slow, stable, and reliant on policy support. The key uncertainties are whether upcoming data confirm growth bottoming out, whether deflation eases, and how Beijing prepares for potential U.S. tariff changes in 2026.

Japan

Equity markets remain buoyant, with expectations that Japanese corporates will continue to benefit from AI related demand and domestic resilience. However, the stimulus induced surge in bond yields and yen volatility underscores the delicate balance the BOJ must strike between controlling inflation, supporting growth and maintaining financial stability. Investors should monitor U.S. trade policy, global growth prospects and domestic wage negotiations, all of which will shape Japan’s economic landscape in December 2025 and beyond.

Japan Economic Review – November 2025

Japan closed November 2025 at a genuine turning point: domestic fundamentals looked relatively solid, but markets were dominated by fears about Bank of Japan (BoJ) tightening, a weak yen, and rising geopolitical and fiscal risks. Activity data into Q4 signalled ongoing expansion driven by services, capex and retail, while inflation remained above target and policy normalization concerns kept volatility high across FX and equities.

Headline Q3 GDP showed a modest contraction, driven mainly by weak net exports and soft private consumption under the pressure of a weak yen and higher living costs. Yet high-frequency indicators painted a stronger picture heading into Q4. Industrial production rebounded through September and October, capacity utilization improved, and leading and coincident indices moved comfortably above 100, all consistent with continued, if moderate, expansion. Retail sales surprised positively, with solid growth at large and total retailers, indicating households are still spending despite real-income pressures. Services activity strengthened further, with the Tertiary Industry Index rebounding and PMIs showing services in clear expansion, even as manufacturing hovered just below the 50-line.

Investment trends were mixed but broadly supportive. Core machinery orders rose strongly on both monthly and annual bases, pointing to ongoing corporate investment in automation, reshoring and capacity upgrading. Housing starts returned to growth, suggesting stabilization in residential investment. However, construction orders for large projects slumped, hinting at a weaker pipeline for long-horizon capex amid uncertainty over the policy path and fiscal priorities.

The labour market remained tight but slightly less so. The jobs-to-applicants ratio eased modestly but stayed well above one, and unemployment remained in the mid-2% range. Wage income grew around 2% year-on-year, with overtime pay also up, helping support consumption even as inflation eroded purchasing power. Bank lending growth above 4% YoY underscored solid credit demand and ample liquidity.

Inflation stayed decisively above the BoJ’s 2% target. Tokyo CPI showed headline in the high-2% range and core near 3%, with “core-core” inflation lower but still positive. Producer prices remained elevated in the high-2% range, reflecting a weak yen and high input costs. Inflation expectations eased slightly but remained elevated, reinforcing the view that Japan has exited its deflationary past, but at the price of persistent, if not runaway, inflation.

Fiscal policy became more expansionary with a large supplementary package of around ¥21.3 trillion, mostly debt-financed, aimed at cushioning households and supporting growth. This boosts near-term activity but deepens concerns over already high public debt and the eventual interaction between fiscal expansion and BoJ balance-sheet policy.

Markets increasingly see Japan in early-stage policy exit. Above-target inflation, firm domestic demand and tight labour markets argue for gradual normalization, yet the BoJ remains cautious given the Q3 GDP contraction, weaker construction, fragile global conditions and FX risks. The current account surplus and strong overseas income provide structural support, but the yen’s weakness keeps intervention risk high. Equities and FX traded with elevated volatility, reflecting the nervous transition from ultra-easy policy just as geopolitical tensions and global tech de-risking intensify.

Overall, Japan enters December with a solid but not risk-free domestic backdrop, navigating a delicate shift away from emergency monetary settings while trying to preserve growth and financial stability.

Japan Economic Outlook – December 2025

Japan’s economy enters December 2025 at a turning point, balancing solid domestic demand against external and fiscal risks, Household demand is slowly improving but constrained by negative real wages, but the Cabinet Office still describes the economy as in a “moderate recovery,” supported by investment in software, digitalisation and productivity.

Against this backdrop, the Takaichi government has approved a large ¥21.3 trillion stimulus package, partly debt-financed, to cushion households from inflation. Markets reacted with a sharp sell-off in JGBs, pushing 10-year yields above 1.8% and weakening the yen toward ¥157 per dollar, intensifying pressure on the Bank of Japan to normalize policy.

The BOJ’s policy rate has been 0.5% since July 2025, but markets and many analysts expect a 25 bp hike to 0.75% at the 18–19 December meeting, with further gradual increases likely in 2026–27 if wage momentum holds. Key December data—Tankan, machinery orders, CPI, labour market and production—will be critical in confirming whether Japan can sustain a wage-driven, domestically led recovery while managing fiscal risks, currency volatility and external headwinds from U.S. tariffs and global slowdown fears.

Japan’s economy is expected to continue its moderate recovery into 2026, supported by robust capital spending, wage driven consumption and fiscal stimulus, but constrained by weak exports and high import costs. Inflation is likely to stay above the BOJ’s 2 % target into 2026 due to persistent food and services price pressures. With real wages still negative, labour unions are pressing for another year of substantial pay hikes, which could allow the BOJ to begin normalizing monetary policy at the December meeting. Most analysts expect a 25 bp rate hike to 0.75 %, with additional gradual increases in 2026 and 2027. Markets will closely watch the Tankan survey and November CPI results for confirmation of wage momentum and inflation persistence.

Equity markets remain buoyant, with expectations that Japanese corporates will continue to benefit from AI related demand and domestic resilience. However, the stimulus induced surge in bond yields and yen volatility underscores the delicate balance the BOJ must strike between controlling inflation, supporting growth and maintaining financial stability. Investors should monitor U.S. trade policy, global growth prospects and domestic wage negotiations, all of which will shape Japan’s economic landscape in December 2025 and beyond.