Overview

The large tariff increases announced by the Trump Administration this month will place significant pressure on global growth. We have lowered our 2025 and 2026 growth forecasts for a wide range of countries, particularly China and (last week) the US, and we now expect global growth of around 2¾% in both years (previously around 3.0%). Recessions are highly likely in some countries (e.g. Canada and Mexico) and are a risk for others, including the US. It is worth stressing that forecast uncertainty is higher than normal.

Apart from the direct impacts of tariffs, heightened policy uncertainty, weakening business and consumer sentiment, and financial market volatility will all take their toll. How policy makers react will also be important. In the US, Congress is considering tax cuts, the Euro-zone was already moving towards extra fiscal spending, while China is also likely to increase policy support for its economy, as are other countries.

Central banks can also move to support economies, although for the US Fed (and Bank of Canada), given tariffs will lift inflation, how inflation expectations evolve (and whether there is any sign of de-anchoring) are important factors to watch.

The uncertainty is unlikely to recede any time soon. US reciprocal tariffs above 10% are on a 90 day pause and further sector specific tariff increases are expected. There is a clear incentive for many businesses to delay investments (and hiring).

Global equity and commodity markets plunged following the tariff announcement and there have been large moves in bond and currency markets. Typically the US experiences safe haven flows in times of volatility and weakening growth prospects, however the fall in the US dollar and increase in US sovereign bond yields point to changing investor views on the US as a destination for investment capital.

The extreme tariffs on US-China trade in both directions means that trade between the world’s two largest economies is likely to slow to a trickle. A work-around may occur through trade diversion where the US/China source imports from elsewhere, but given the tariff uncertainties, the incentive to build up extra capacity is likely limited (and takes time to put in place in any event). There is also the risk that Chinese exporters seeking alternative markets may lead countries to impose trade barriers on imports from China to protect domestic producers.

Export controls imposed by China on critical minerals add to near term supply chain pressures. This follows US controls on certain technology exports to China. The de-coupling in global trade underway – mainly between China and US but with the risk countries will have to pick a side – is a clear negative risk for longer-term global productivity and hence growth.

For further details, please see The Forward View Global (April 2025)