Unpredictable U.S. trade policy remains front and center in the global macro picture. The new administration imposed import tariffs to levels not seen in decades--before making a sudden, partial pause. Producers, consumers and financial markets have struggled to adjust. These shocks to the system come on top of an ongoing recalibration of supply chains and industrial policy amid high geopolitical tensions. Globalization continues to evolve as the Washington Consensus gives way to a new order that has yet to be fully defined.

Since our previous quarterly forecasting round, the U.S. administration imposed substantial tariffs on virtually all trading partners before partially pausing them until early July. The last quarter also saw a short-lived trade conflict with China, with both sides escalating tariffs to over 100%. That bilateral episode was unwound, with a subsequent six-month patch.

Markets calmed following a volatile first half of the year. Driven by abrupt changes in U.S. tariffs policy--both actual and threatened--markets have seesawed. The general pattern has been a sharp decline following a tariff escalation, followed by a sharp rebound following a partial tariff pause.

Equity markets have regained their levels of early 2025 for the most part, while bond markets have not, reflecting fiscal as well as tariff policy developments. Crucially, measures of market volatility have fallen as tariffs paused, but measures of policy uncertainty remain elevated (see chart 1).

Chart 1

Our high-level narrative for the "Big 3" economies was dominated by tariff developments.

• U.S.: Output contracted fractionally in the first quarter as imports surged in an effort to front-run tariffs. Consumption growth slowed but remained above 1%, in contrast with ongoing weakness in "soft data." Preliminary data suggests that second-quarter GDP growth will rebound to 3%-4% as the trade anomaly largely unwinds.
• Eurozone: GDP rose significantly by 2.5% annualized during the first quarter of 2025. Slightly less than half of this growth resulted from net exports, helped by Ireland's front-running of pharmaceutical exports to the U.S. ahead of potential tariffs. These trade flows started to reverse in April 2025. Domestic demand is strengthening.
• China: The resilience of growth in the first half of 2025 was helped by robust exports, partly due to a temporary frontloading of shipments to the U.S. Domestically, although housing sales are close to stabilizing, housing construction continues to slide. That construction weakness weighs on investment even as consumption growth improves steadily.

First-quarter national accounts data was distorted by the front-running of tariffs. As a general rule, net importer countries saw a decline in growth while net exporting countries saw a spike in growth.

As an example of the former, U.S. growth declined in the first quarter as net exports subtracted another 4 percentage points (ppts) from growth (due to the surge in imports), which was only partially offset by inventory accumulation (see chart 2).

On the latter, a number of export-led economies such as China and Ireland saw healthy pick-ups in growth as shipments rushed to beat the tariffs, at least partially met by new production rather than inventory depletions.

We expect these anomalies to unwind in the second quarter and will look at the first half of the year as a whole.

Chart 2

Labor markets in advanced economies remain tight, although the churn has diminished. Unemployment rates remain low by historical standards as the consumer-labor demand nexus remains firm. The 4.2% rate in the U.S. is below trend and is near our estimate of the neutral rate. In the eurozone, the 6.7% rate is at an all-time low despite the economy exiting from a borderline recession.

The churn in the labor market has decreased as both hiring (due to slower demand) and firing (due to firms holding on to workers following the post-pandemic dislocation) have declined.

Bond yields have risen, reflecting multiple factors. U.S. fiscal policy looks to be even more expansionary than in the previous year. This has spooked the markets and pushed yields higher. The benchmark 10-year Treasury yield climbed to over 4.6% in late May before partially retracing its path with knock-on effects on other sovereign yields.

In the eurozone, higher bond yields reflect reflation views, with higher fiscal spending on infrastructure and defense, mainly from Germany, in the pipeline. More generally, tariffs will give at least a temporary boost to inflation, especially where the pass-through to final consumers is high or inflation expectations are less well anchored.

Central banks continue to cautiously lower rates. These moves reflect lower inflation pressures stemming from stronger local currencies (which lower import prices) as well as lower oil prices. The absence of any pass-through of higher tariff rates so far also contributed to this outcome.

Since our last report the trend of modest rate cuts that began in mid-2024 has persisted, with the notable exception of the U.S. Federal Reserve. All moves by central banks in advanced countries in the second quarter of 2025 were by 25 basis points (bps). The European Central Bank (ECB) cut rates twice, while the Bank of England, the Bank of Canada, and the Reserve Bank of Australia each cut once. The Swiss National Bank cut rates to the zero lower bound. Policy rate cuts were more aggressive in emerging markets, including a surprisingly large cut of 100 bps in India.

Chart 3

The escalation of the Israel-Iran military conflict in June has partly reversed the market effects of U.S. tariffs. Pre-conflict, disinflation pressures were growing on two fronts. Oil prices were falling, lowering overall inflation pressures, particularly in emerging markets where the weights in consumption baskets are higher. Also, the weakening of the U.S. dollar and strengthening of local currencies were lowering import prices. Both of these provided additional scope for central banks to lower policy rates.

With the escalation of the conflict, the DXY dollar index halted its year-to-date decline while the price of West Texas Intermediate crude oil rose by as much as 30% to $78 per barrel as of late June.

Updated GDP Growth Forecasts

Our growth forecasts are little changed compared with our May baseline for most countries. But the world GDP growth rate for both 2025 and 2026 is 30 bps higher than previously, at 2.9%.

In the advanced economies, we now see slightly higher growth in the U.S. this year (at 1.7%) as tariff related impacts look lower than previously estimated. Elsewhere, our forecasts for Canada, the eurozone, the U.K. and Japan are largely unchanged.

Table 1

We did raise some of our growth forecasts for emerging markets. We now see China's growth as meaningfully higher as extreme tariff fears ease. We lifted our forecasts by 80 bps to 4.3% for 2025 and 100 bps to 4.0% for 2026. We raised Brazil's growth by 40 bps to 2.2% for this year. We also increased our forecasts for India and Mexico, and lowered South Africa's.

Our growth narratives for major countries and regions are as follows:

United States

Growth is slowing, although the negative outturn for first-quarter GDP overstates the case. The second quarter should see a rebound and first-half growth should be around 1.5%. High interest rates and tariff-related uncertainty should slow growth to around 1% by the end of 2025. Our recession probability remains at around one-third. Next year, stimulatory fiscal policy, lower rates (in late 2025) and supply-side reforms should result in a modest pick-up in growth, climbing back towards 2%. We see unemployment rising 30 bps to 4.5% by end-year.

For details, see "Economic Outlook U.S. Q3 2025: Policy Uncertainty Limits Growth," published on June 24, 2025.

Europe

The European economy has largely rebalanced following the COVID-19 pandemic and the outbreak of the Russia-Ukraine war. 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 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.

For details, see "Economic Outlook Eurozone Q3 2025: Strength From Within," published June 24, 2025.

China/Asia-Pacific

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 and external factors unlikely to significantly constrain monetary policy easing, Asia-Pacific central banks are likely to continue to cut policy rates, in our view.

For details, see "Economic Outlook Asia-Pacific Q3 2025: Resilience May Vary," published on June 24, 2025.

Emerging Markets

The direct impact of shifting U.S. trade policy on economic growth in emerging markets (EMs) has so far been relatively small 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 including higher oil prices amid the Israel-Iran conflict, a weaker U.S. economy than we now expect, more upside pressure on long-term U.S. treasury yields, and challenging fiscal dynamics across several EMs.

For details, see "Economic Outlook Emerging Markets Q3 2025: Tariffs' Direct Impact Is Modest So Far, But Indirect Effect Will Feed Through," June 24, 2025.

Downside Risks Are Piling Up

Our top risk is that the current tariff calm is only temporary. The U.S. tariffs rolled out on April 2, 2025 are on hold until early July. And the triple-digit bilateral China tariffs are on hold for six months, reflecting a recent agreement on a few specific bilateral restrictions.

Markets reacted very negatively to the imposition of these tariffs, and very positively to their pause. Our read is that the market recovery reflects a view that the pauses will evolve into more permanent agreements. That outcome is by no means guaranteed.

Chart 4

A break in the consumer spending–labor demand nexus remains a key risk. As we argued in recent reports, the resilience of this nexus continues to surprise. As noted above, unemployment remains low but the market churn has narrowed. There are fewer jobs on offer, but firms are also holding on to workers, reportedly because of their difficulty in finding labor as the pandemic retreated. Recent modest weakening in labor markets could accelerate if demand softens further.

A spike in financial stress is another downside to our forecasts. The recent rise in government bond yields is a reminder that market reaction in the face of deteriorating debt sustainability metrics may no longer be quiescent. For example, the five-year credit default swap rate on U.S. government debt spiked to nearly 60 bps following the April 2 tariff announcements before dropping to 44 bps in June, which is still above the long-term average.

More aware bond markets also raise the specter of a failed auction, which could put further stress on yields and cause a spike in market volatility. These, and the knock-on effects of more generalized market closure in response to a sharp rise in risk aversion, could have effects on the real economy.

An escalation of the Israel-Iran conflict also threatens our baseline. Despite the hostilities so far, the market reaction has been muted. Most of the price action has taken place in the energy markets, where the price of oil has risen to the mid-$70 range. While this is up sharply from recent lows, it has returned to the mutual comfort zone for both consumers and producers. Any escalation of spread of the conflict risks a spike in prices, which will generate demand destruction (as funds for non-oil spending drop), raising downside risks to growth.

Tariff Volatility Leaves Macro Money On The Table

The outlook will remain under pressure as long as policy unpredictability persists. As a general proposition, U.S. tariff policy is pausing or slowing spending. This includes investments in long-dated projects, slower consumer spending on big-ticket times, and crimped markets for speculative-grade credits, and M&A.

The ups and downs of market risk measures such as the VIX puts a further damper on demand. Wait and see, stemming from swings in prices, is not good for demand. The longer this lasts the larger the downside risk to macro outcomes.

Tariff policy drama is also blunting upside growth potential. Supply-side reforms have the possibility of increasing trend growth but remain in the background for now. Permitting and other ease of doing business reforms are largely postponed or being overwhelmed by policy uncertainty.

AI could provide a boost to growth, but those effects risk being strung out. Again, with tariffs sucking all of the oxygen out of the room, the risk is that the upside benefits to growth are left on the table.

Recent Research

• Economic Outlook U.S. Q3 2025: Policy Uncertainty Limits Growth, June 24, 2025
• Economic Outlook Asia-Pacific Q3 2025: Resilience May Vary, June 24, 2025
• Economic Outlook Eurozone Q3 2025: Strength From Within, June 24, 2025
• Economic Outlook Emerging Markets Q3 2025: Tariffs' Direct Impact Is Modest So Far, But Indirect Effect Will Feed Through, June 24, 2025