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.

U.S. Economic Outlook Update: Higher Tariffs And Policy Uncertainty To Weaken Growth

A working assumption of sharply higher U.S. average effective tariff on imported goods as well as the persistent unpredictability of policy have led us to update our U.S. macroeconomic forecasts.

According to our new baseline forecast, the U.S. economy will expand 1.5% and 1.7% on an annual average basis in 2025 and 2026, respectively, (down from 1.9% in our March forecast), with domestic demand (GDP excluding net exports) growing at a less than 1% annualized pace for the rest of this year.

The tariff-induced price shock would raise core consumer price inflation to 4.0% by the end of this year, while lower oil price assumption should put a lid on headline inflation at 3.5%.

The unemployment rate will drift higher as weaker growth takes hold, potentially peaking at 4.7% in the first half of next year, despite curbs on immigration and a rise in deportations slowing labor force growth.

We anticipate the Federal Reserve to ease by 50 basis points in the final quarter of 2025, when greater downside risk to employment begins to outweigh the upside risks to its inflation outlook.

Economic Outlook Eurozone Q2 2025: A World In Limbo

We revised our eurozone GDP growth forecast for 2025 downward to 0.9%, from 1.2% previously, due to uncertainty and U.S. tariffs. However, we expect a substantial recovery from 2026, thanks to fiscal stimulus measures in Germany and the EU. For 2026, we now forecast GDP growth of 1.4%.

The European Central Bank (ECB) could deliver its final rate cut of the year by June, when interest rates might decline to 2.25%. We expect rate hikes as early as the second half of 2026 because fiscal stimulus programs will push growth beyond its potential.

The economic outlook is uncertain, which is why we have included alternative scenarios for the outcome of U.S. tariffs in this publication. In a severe tariff scenario, GDP growth in the eurozone could be limited to 0.5% in 2025 and 1.2% in 2026, with the ECB cutting interest rates more than once this year and raising them later than we currently expect.

Trade uncertainty, potential failure to execute fiscal plans, and spillovers from the U.S. economy currently dominate the balance of risks. However, positive factors could tip the balance if the positive effects from fiscal stimulus programs exceed expectations or confidence improves rapidly.

Economic Outlook Asia-Pacific Q2 2025: U.S. Tariffs Will Squeeze, Not Choke, Growth

While U.S. tariff hikes will hit China's economy, offsetting factors keep our 2025 growth forecast unchanged at 4.1%.

Better growth at the end of 2024 will lift China's 2025 GDP gains; this year's growth target and fiscal stimulus are more ambitious than we had expected.

While U.S.-led trade friction will weigh on the ex-China Asia-Pacific economies, we expect domestic demand momentum to mostly remain solid, generally leading to only modest downward revisions to GDP forecasts.

Still, as the growth outlook softens and inflation is likely to stay moderate, central bankers will increasingly be willing to risk some currency depreciation and cut policy rates

Economic Outlook Emerging Markets Q2 2025: Trade Policy Unknowns Dampen Investment

Lack of visibility over U.S. trade policy is likely to delay investment decisions, with negative implications for GDP in most emerging markets (EMs) this year.

The direct impact of tariffs will be modest in most major EMs outside of Asia and Mexico.

However, if tariffs lead to slower growth in the U.S., other major advanced economies, and China, the knock-on effects in EMs could be substantial.

As we learn more about the specifics of U.S. trade policy, we will also better understand its impact on EMs, but we believe the risks to our growth outlook are mostly to the downside.

Development Needs Explain Transition Costs In Emerging Markets

Decoupling of GDP growth from emissions growth has not yet happened in emerging and frontier markets (EFMs). We estimate that 6.3% of GDP (about $2.6 trillion, or $1.4 trillion excluding China) is required by 2030 for EFMs to achieve the committed share of renewables in electricity production under the IEA's Stated Policies Scenario (STEPS).

Economic development is a key part of the challenge. As EFMs catch up, their energy demand could converge with that of advanced economies, raising the need to expand the clean energy supply and avoid increased reliance on fossil fuels. Yet, finance, infrastructure gaps, and lacking access to technology are barriers to speeding up the transition.

Financing is one of the impediments to the energy transition, especially in frontier economies, which we estimate would need to spend 4x more than emerging markets. But infrastructure and technology gaps, scarce resources to meet other basic needs, limited fiscal space, and small capital markets also play a role.

On the positive side, some of the key resource inputs for the transition, such as solar energy and critical minerals, are located in EFMs, which could provide another source of growth and helped EFMs catch up.