Overview

While the US-China trade détente represents a significant de-escalation from the extremes of early April, tariffs imposed by both countries are well above the last year’s levels, as are US tariffs on other countries. With the US considering sector specific tariffs and Liberation Day ‘reciprocal’ tariffs above 10% only on pause until 9 July (mid- August for China), there is still significant uncertainty on where US tariffs ultimately settle.

The US and UK trade agreement maintained the minimum ‘reciprocal’ tariff rate of 10% but provided some preferential access in some areas. The UK runs a trade deficit with the US, meaning it has not been a target of US trade policy. This suggests that a 10% tariff rate, with some exceptions, may be the best outcome, with the risk that higher rates ultimately are imposed on a range of other countries. The latter scenario would be a negative for a broad range of emerging economies, particularly in Asia.

For now, the reduction in US-China bilateral tariffs goes some way to reducing the damage of the April tariffs. Apart from lowering the direct trade impacts (and a reduced fiscal drag on the US), financial markets were boosted by the news, leading to an improvement in financial conditions (including a recovery in equity prices). However, US tariffs remain high, the continued uncertainty about US tariff policy will remain a drag on business decision making and it is unclear whether business and consumer sentiment will be fully restored.

As a result, while we have revised up our forecasts for global growth in 2025 and 2026 from post Liberation Day estimates, we still expect growth to take a step down from its 2024 pace, to a low rate by historical standards.

While the focus is on trade policy, other policy settings will be important. The US Congress is in the midst of a budget reconciliation process, and its looks likely that US fiscal policy will turn stimulatory in 2026. While the reduction in US tariffs is a positive for China growth prospects, this could potentially reduce the scale or delay the implementation of fiscal support to the economy (which we expected would be reactive to the trade slowdown). Energy prices have also softened – while this is partly owing to expectations of weaker demand growth, it also reflects an unwinding of voluntary production cuts by OPEC – all else equal, this represents a (small) positive supply shock in what has otherwise been a year of growing policy headwinds.

We forecast the global economy to grow by 2.9% in both 2025 and 2026 (previously 2¾% in both years). As we have noted in recent months, the confidence bands around our forecasts are unusually wide at present – reflecting the high level of policy uncertainty in the current economic climate.

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