Global economy

Global growth has slowed since the start of 2025 amid the ongoing shifts in US trade policy and the resulting uncertainty. Still, the global economy has remained resilient so far, even though US tariffs are at their highest levels in decades.

Since January, the United States has threatened, imposed, paused and reinstated tariffs on many of its trading partners. More recently, it has negotiated agreements on tariffs with some countries, and the trade war with China has moderated. Consequently, financial conditions have recovered in recent months, and confidence has improved from a very low level. Because of this, a rapid slowdown in economic activity has been avoided (Table 4 and Chart 19).

However, the situation remains fluid, and the level of tariffs is high by historical standards. Given the ongoing uncertainty around US trade policy, the July Report presents a current tariff scenario instead of a base-case projection. The current tariff scenario is conditional on trade policies in place or agreed on as of July 27, 2025 (see the Scenario assumptions section).

In addition, because the outlook is more uncertain than usual, this Report presents two alternative scenarios—a de-escalation scenario and an escalation scenario (see In Focus: The path of US tariffs remains uncertain).

In the current tariff scenario, the weighted average US tariff rate stays elevated at 13%—its highest level in decades and more than 10 percentage points above its rate at the start of 2025 (Chart 20). Retaliatory actions from other countries are modest, leaving the average tariff on US exports about 1 percentage point higher. Uncertainty related to tariffs is elevated, but its effects dissipate in 2026.

In this scenario:

• Global growth slows to around 2.5% by the end of 2025 before picking up and stabilizing at around 3% over 2026 and 2027.
• Tariffs cause US inflation to rise to about 3% by the end of 2025. It declines thereafter.

United States

Tariffs and uncertainty are weighing on growth of gross domestic product (GDP). After initially slowing, economic growth picks up in the second half of 2025. However, the trajectory for the level of GDP is permanently lower.

Tariffs have dampened US growth

US growth slowed in the first half of 2025 to around 1% on average from around 2¾% in the second half of 2024. Household spending was held back by uncertainty related to trade and other economic policies (Chart 21). However, the slowdown was not as severe as it could have been. In particular, domestic demand was relatively resilient, supported by:

• improved business and consumer confidence and a recovery in US equity markets in recent months
• investment related to artificial intelligence (AI)

Other factors that supported GDP growth include robust trend productivity growth and solid job creation. In contrast, changes to immigration policy are weighing on labour supply.

Exports and imports were volatile over the first half of 2025 as businesses adjusted the timing of purchases due to tariffs. The United States imported less from China and Canada and more from Europe and countries that are members of the Association of Southeast Asian Nations (ASEAN) (Chart 22).

Tariffs have started to affect prices

US consumer price index (CPI) inflation remained close to 2.5% in the second quarter of 2025 (Chart 23). Inflation in the prices of goods and services excluding food and energy was 2.8%. There is evidence that tariffs are being passed on to consumer prices. For example, data for June showed sizable increases in the prices of tariffed consumer goods, such as household equipment and appliances. In addition, households’ and businesses’ expectations for inflation continue to be elevated, likely indicating that they anticipate that tariffs will add ongoing upward pressure to prices.

Wage growth has been solid and, given robust labour productivity growth, remains consistent with the Federal Reserve’s 2% inflation target. Interest rates are restraining demand and putting downward pressure on inflation.

Tariffs continue to weigh on US growth

In the scenario, tariffs and uncertainty weigh on US economic activity. The increase in tariffs permanently reduces the path for the level of GDP.

GDP growth picks up modestly to about 2¼% on average in 2026 and 2027.

• Growth in consumption spending slows meaningfully in 2026 because tariff-driven inflation erodes income gains and policy uncertainty weighs on consumer confidence. Expansionary fiscal policy and an easing in monetary policy provide partial offsets. Consumption recovers in 2027, supported by real wage growth and the diminishing effects of uncertainty.
• Business investment growth is restrained by tariffs and ongoing uncertainty. The rollout of AI-related spending provides a boost in the near term.
• Export growth picks up modestly in 2026 and 2027 due to improving global demand and the depreciation of the US dollar. Imports fall sharply in response to tariffs before recovering in 2027.

US inflation picks up and peaks close to 3% at the end of 2025 as the impact of tariffs takes hold and the effect from past declines in the price of oil fades. It then moderates as the impact from tariffs dissipates.

Euro area

Growth in the euro area moderated to near 1% in the first half of 2025 reflecting slower growth in domestic demand, which was partially offset by a strong pull-forward of exports to the United States ahead of tariffs. Despite uncertainty due to US tariffs, demand remained reasonably resilient, aided by past cuts to interest rates.

Inflation in the euro area continued to ease in the first half of 2025. The moderation in inflation reflects:

• falling energy prices
• increasing productivity growth
• slowing wage growth

In the scenario, GDP growth remains weak in the second half of 2025 due to the impacts of US tariffs. Growth picks up in 2026 and 2027 as tariff uncertainty fades and government spending increases, partly due to increased defence spending.

The pick-up in demand brings the euro area economy into balance, and inflation remains close to the European Central Bank’s target of 2%. The trade conflict has only a small effect on inflation in the euro area because it is assumed the region does not impose retaliatory tariffs on the United States.

In the scenario, GDP growth averages just below 4½% in 2026 and 2027. Because of US tariffs, exports contribute less to growth than they have in recent years. Domestic demand strengthens because trade-related uncertainty dissipates, further policy stimulus is provided and stabilization in the property sector leads to a recovery in consumer confidence.

Commodities

Oil prices rose in June to close to US$80 per barrel due to concerns that an escalation of the conflict in the Middle East could disrupt supply. But prices have since dropped back to US$69, slightly above the level at the time of the April Report. The Bank’s non-energy commodity price index has been broadly flat because falling prices for industrial metals have been offset by rising gold prices.

Energy prices have been volatile

Prices for Brent oil have been volatile since the April Report, fluctuating between US$60 and US$80. This is largely the result of the conflict in the Middle East threatening the supply of oil (Chart 25). When inflation is accounted for, oil prices are lower than in recent years. This weakness in prices is due to several factors, including:

• strong oil production globally
• concerns that the trade conflict will reduce future demand for oil

The spread between West Texas Intermediate and Western Canadian Select has remained steady at around US$10.

Natural gas prices have been supported by strong demand for electricity in the United States. This reflects growing demand because of data processing and extreme weather.

Non-energy commodity prices are flat

The Bank of Canada’s non-energy commodity price index is roughly unchanged since the April Report. US tariffs on steel and aluminum have put downward pressure on international prices for iron, nickel and aluminum. In contrast, gold prices have continued to rise, supported by central bank purchases and by investors seeking a hedge against trade tensions and rising geopolitical uncertainty. After climbing earlier in the year, prices for agricultural products have been broadly stable.

Financial conditions

Since January, financial markets have gone through two distinct phases. Between January and April, the announcement of sweeping new tariffs weakened markets’ expectations for growth. Uncertainty and volatility rose, and many asset prices fell. Since April, many asset prices have recovered strongly in response to the markets’ assessment that tariffs and their impact will likely be less severe than previously anticipated (Chart 26).

From January to April, financial markets were extremely volatile.

• Equity markets fell sharply as risk sentiment deteriorated. The largest declines from peak levels across major markets ranged from 10% to 20%.
• The deterioration in risk sentiment also led to higher credit spreads globally.

During this period, markets also priced in additional monetary policy easing by central banks in response to weaker expectations for growth. This led to a decline in short-term government bond yields, both in Canada and globally.

Since the April Report, these price movements have essentially all reversed.

• In response to signs of economic resilience, global equities have recovered and are now trading at or above their levels at the start of 2025.
• Corporate credit spreads have fully recovered and are in line with their levels at the beginning of 2025. Market volatility is now also more in line with historical averages.

Market assessments of growth outlooks have improved. Therefore, markets have priced in less monetary policy easing and the expected policy interest rate paths have returned closer to the levels they were at in early January. This has led to an increase in short-term government bond yields in Canada and many other countries.

Since early April, long-term government bond yields have also risen in many countries, including Canada. They are now generally higher than observed in January. In part, this reflects higher expected paths for policy rates. As well, some investors have continued to demand a higher term premium for holding long-term government bonds because they are concerned about high public debt and deficits in some countries.

Since the beginning of 2025, the US dollar has depreciated steadily against many other currencies. The Nominal Broad US Dollar Index has declined by about 8% from its peak in early January. The value of the Canadian dollar has strengthened against the US dollar to about 73 cents US but has weakened modestly against a basket of other currencies.

Continuing depreciation of the US dollar appears to be linked to reduced trade-related uncertainty and improved growth outlooks in economies other than the United States. In addition, there is evidence that some investors are hedging their exposures to the US dollar due to concerns about the future direction of US policy and fiscal outlooks.

Endnotes