Global Macro Update: Seismic Shift In U.S. Trade Policy Will Slow World Growth

A seismic and uncertain shift in U.S. trade policy has roiled markets and raised the specter of a global economic slowdown. As a result, we have updated our macro view.

The jump in U.S. import tariffs, trading partner retaliation, ongoing concessions, and subsequent market turbulence constitute a shock to the system centered on confidence and market prices. The real economy is sure to follow, but by how much?

We have again lowered our GDP growth forecasts for most countries and raised our inflation forecast for the U.S. We see a material slowdown in growth, but do not foresee a U.S. recession at this juncture.

The risks to our baseline remain firmly on the downside in the form of a stronger-than-anticipated spillover from the tariff shock to the real economy. The longer-term configuration of the global economy, including the role of the U.S., is also less certain.

U.S. - China Tariff De-Escalation Brings Some Temporary Relief

In another twist, the U.S. and China sharply reduced bilateral tariffs on May 12, and enacted a 90-day pause to help facilitate a broad-based agreement. Market reaction was positive, but policy uncertainty remains high. We caution that more progress is needed to return to a semblance of trade policy normalization. The latest U.S.-China tariff moves are growth positive and, assuming they hold, would raise our GDP growth forecasts closer to our previous, March 27, 2025, forecast round.

Economic Outlook U.S. Q3 2025: Policy Uncertainty Limits Growth

S&P Global Ratings Economics forecasts below-potential U.S. real GDP growth of 1.7% in 2025 and 1.6% in 2026 as growth is restrained by slower population growth, tariffs, and the federal government’s cost-cutting initiatives.

We expect weaker growth in the near-term to soften the labor market further in the next 12 months, with the unemployment rate rising to 4.6% by the first half of next year before gradually returning to its long-run average of 4.1% by mid-2027.

We believe tariffs will settle below their April peak in the coming months but still materially higher than 2024. We therefore anticipate core consumer price inflation of 3.0%-3.5% by the end of the year.

We expect the fed funds rate will be 3.75%-4.00% by end-2025 and will reach its nominal neutral of 3.00%-3.25% by end-2026.

Economic Outlook Eurozone Q3 2025: Strength From Within

We do not expect tariff-related volatility to hamper the ongoing recovery in domestic demand. Public spending on infrastructure and defense should boost growth from 2026.

We expect core inflation will remain close to the European Central Bank's (ECB's) target. Further rate cuts are unlikely, unless new shocks occur.

Our forecasts remain contingent on the outcome of trade negotiations. In a severe tariff scenario, we could reduce our eurozone growth forecasts for 2025-2026 by 0.4%, with the ECB potentially resuming rate cuts.

Economic Outlook Asia-Pacific Q3 2025: Resilience May Vary

While U.S. tariffs are hitting China's exports, relatively resilient domestic demand should contain the economic slowdown. We expect China's GDP growth to be 4.3% in 2025 and 4.0% in 2026.

U.S. tariffs, the elevated uncertainty about them, and soft Chinese imports will weigh on Asia-Pacific economies. We expect favorable domestic demand to limit the slowdown in overall GDP growth in 2025, but less so in the more export-oriented economies.

With inflation not a major risk, more focus on growth risks and external factors unlikely to significantly constrain monetary policy easing, we expect Asia-Pacific central banks to continue to cut policy rates.

Economic Outlook Emerging Markets Q3 2025: Tariffs' Direct Impact Is Modest So Far, But Indirect Effect Will Feed Through

The direct impact of shifting U.S. trade policy on economic growth in emerging markets (EMs) has so far been modest amid lower-than-feared effective tariff levels.

However, we expect the indirect impact of tariffs, namely slower global demand and softer investment due to trade policy uncertainty, to become more noticeable in the coming quarters.

A weaker U.S. dollar will encourage most EM central banks to continue lowering interest rates, partially cushioning the impact of U.S. trade policy uncertainty.

There are significant downside risks to our growth outlook for EMs, such as the potential for higher oil prices amid the escalation of the conflict in Iran, a weaker-than-expected U.S. economy, more upside pressure on long-term U.S. treasury yields, and challenging fiscal dynamics across several EMs.

Net-Zero Transition Stutters As Geoeconomic Risks Increase

Geoeconomic security concerns are reshaping the transition to net-zero emissions. Immediate risks take precedence over long-term sustainability goals, even though global emissions keep rising.

Weaker climate policy commitments and trade tariffs will slow progress toward net zero, with less public funding available to derisk net-zero technologies and emerging markets. This reduces private sector incentives to invest in clean technologies.

Asia-Pacific (APAC)--particularly China--and the EU will continue to lead the development and adoption of clean technologies. Yet diverging industrial and trade policies will likely continue to create tensions.