Global economy

Global growth has been resilient. But the historic rise in US tariffs is reshaping global trade, weighing on prospects for global growth and pushing up inflation in the United States.

US trade policy has shifted significantly since January, which is leading to a reconfiguration of global trade. The average US tariff rate has risen to 17%—the highest it has been in more than 80 years—from just above 2% at the start of 2025 (Chart 25).

New tariffs continue to be announced on top of existing tariff agreements with the United States. While uncertainty around US trade policy remains elevated, it has eased from its peak earlier in 2025 (Chart 26). At the same time, retaliatory tariffs have been very modest.

The consequences of US trade policy are playing out in numerous ways:

• Exporters are rerouting goods to avoid tariffs.
• Tariffs and uncertainty are weighing on investment decisions in many countries and leading to a reallocation of capital and labour.
• Tariffs are adding meaningful pressure to US inflation and increasing costs in global supply chains.

The global economy was resilient to this structural change in the first half of 2025, with growth just above 3%. This growth was supported by the front-loading of activity ahead of tariffs and by robust domestic demand in China, the euro area and the United States.

But now growth is showing signs of slowing. Global growth is now expected to average 2½% in the second half of 2025. Growth is then anticipated to rise to around 3% in 2026 and 2027.

However, the reconfiguration of global trade and the reallocation of capital and labour in sectors most affected by the trade conflict are expected to put the global economy on a lower path.

The outlook for growth in gross domestic product (GDP) for the global economy and the United States, in particular, is weaker than expected in the January Report, which was the last Report with a base-case projection.

United States

Economic growth in the United States has remained strong despite the imposition of tariffs and the rise in uncertainty. Recently, however, employment growth has stalled, and investment outside of the growth in artificial intelligence (AI) has weakened. Tariffs have also started pushing up consumer prices.1

Economic activity is strong, but job growth is slowing

After rebounding to 3.8% in the second quarter of 2025, US economic growth is expected to average 2.5% in the second half of the year.

• Consumption spending growth, particularly among high-income earners, is anticipated to remain solid due to recent gains in the equity market and growth in real income. This strength will more than offset the effects of price increases tied to tariffs, economic uncertainty and reduced immigration.
• Growth in business investment has been strong, boosted by AI-related spending. Policy uncertainty has hampered investment spending in other areas.
• The federal government shutdown will weigh temporarily on government spending.
• US trade flows are projected to be steady through the second half of 2025 after having been volatile earlier in the year. Export growth is forecast to be modest, while higher US tariffs are expected to significantly limit import growth. Imports from China, Canada and the euro area have declined since the beginning of 2025 (Chart 27).

Employment growth in the United States has slowed sharply, although the unemployment rate has remained relatively stable (Chart 28). Declines in employment in the manufacturing sector have partially offset gains in the health care sector. At the same time, reduced levels of immigration have led to slowing growth in labour supply.

Tariffs have increased core inflation

Consumer price index (CPI) inflation has ticked up, largely because businesses have passed on some of the cost of higher tariffs to consumers (Chart 29). Businesses will likely pass on more of these costs in the coming quarters.

• Core CPI rose to 3.1% in the third quarter of 2025, up from 2.8% in the second quarter, largely because of the effect of tariffs on the prices of goods.  
  • Tariffs imposed earlier this year have led to price increases in many subcomponents of the CPI, such as cookware, motor vehicles and parts, furniture, appliances, tools and hardware.
  • About half of the pass-through of costs from tariffs is assumed to have already occurred by September.
• CPI inflation in services prices has remained elevated.

Manufacturers, businesses in the services sector, and households continue to have high inflation expectations.

Growth is expected to moderate

GDP growth is anticipated to slow in 2026 from its strong pace in the second half of 2025, pulled down by policy uncertainty and higher tariffs. Lower interest rates support household spending.

Overall, growth in the United States is forecast to remain near 2% over the projection horizon (Chart 30). The projected level of US activity is lower than expected in January due to US trade actions, policy uncertainty and reduced immigration. Robust AI-related spending and labour productivity have been sources of strength.

• Business investment growth is expected to moderate in 2026, as the pace of AI-related spending growth slows. Other areas of investment are expected to pick up as the impact from policy uncertainty fades and new depreciation rules from the One Big Beautiful Bill Act come into effect.
• Near-unilateral tariffs induce modest improvements in the trade balance because domestic production replaces imported goods.2

Household spending growth is expected to increase later in the projection horizon as the impact from uncertainty dissipates. Slower growth in government spending and exports provide a partial offset.

Personal consumption expenditure inflation, the Federal Reserve’s preferred measure, is forecast to gradually moderate toward 2½% by the end of 2026 and ease closer to 2% in 2027. This softening reflects both the fading effects of tariffs and the decline in inflation expectations from still-elevated levels.

Euro area

After expanding at about 1.5% in the first half of 2025, growth in the euro area has slowed due to persistent weakness in exports and decreased growth in domestic demand. Inflation has remained near 2%.

• After a sharp pull-back in the second quarter, exports are expected to decline further in the second half of 2025 because of higher US tariffs and issues related to competitiveness, including the recent appreciation of the euro.
• Growth in domestic demand, which has been resilient, is expected to moderate.
• Policy uncertainty negatively affects growth in business investment.

Later in the projection, growth is expected to pick up due to:

• the fading effects from tariffs and related uncertainty
• additional fiscal spending on defence and infrastructure

Altogether, GDP in the euro area is forecast to grow by 1¼% on average over the projection. Inflation is anticipated to remain close to the European Central Bank’s target of 2%.

China

Economic growth in China was solid in the first three quarters of 2025, bolstered by strong government support to households. China has been rapidly redirecting exports away from the United States to other countries. This has mitigated export losses tied to the increase in US tariffs (Chart 31).

Growth is expected to slow in the fourth quarter of 2025 (Chart 32) due to:

• waning fiscal support to households
• a government directive reining in inefficient investment3
• declining activity in the property sector
• slowing industrial production growth

GDP growth in China is expected to slow from about 5% in 2025 to 4¼%, on average, over 2026 and 2027. This moderation is due to population aging, which will reduce the size of the labour force, and a slower pace of capital accumulation.

• US tariffs and new policy guidance to rein in growing excess capacity mean that exports and investment will contribute less to growth than they have in recent years.
• This slowdown is partially offset by stronger growth in domestic demand due to an increase in consumer spending. As the government provides new policy stimulus and property prices stabilize, growth in consumer spending is expected to rise.

Endnotes