An uncertainty-driven recession in investment for the G7

We’ve downgraded our investment forecasts for the G7 significantly over the past nine months. We now expect a shallow recession in capital spending lasting three quarters from 2025 Q2 to 2025 Q4.

The main driver for our forecast of weak G7 investment this year is elevated uncertainty. Although uncertainty measures have eased from April’s peak, they remain high compared with long-term averages. The historical data and our modelling point to this having a significant negative impact on investment, and there are already some signs of this in survey evidence.

What you will learn:

• The historical evidence suggests that sharp rises in these uncertainty measures have been associated with weakening investment. There are already some signs that the spike in uncertainty is having a negative effect on investment. Monthly surveys tracking investment proxies have generally weakened since April in the US, Europe, and Japan and, in all cases, look weak relative to their historical averages.
• Periods of weak investment have often been associated with tightening credit. Notably, US bank credit standards for corporates have started to tighten again, which also implies downward pressure on investment.
• Another nascent negative factor for investment is weakening property prices. In both the US and UK, house prices have started to drop again, threatening to worsen already unfavourable trends in residential investment. Our forecasts expect G7 residential investment to decline 1.8% in 2025.
• We don’t expect central banks to ride to the rescue of investment. Although the monetary backdrop isn’t very favourable, we expect rate cuts to proceed cautiously, especially in the US.