Global GDP to slow to 2.7% amid US trade tariffs: PIIE

Major policy shifts in the United States—particularly the introduction of new tariffs—are weighing on activity and fuelling a high level of uncertainty across economies. US tariffs are raising prices, disrupting supply chains, and eroding real incomes, as per the PIIE report titled ‘Spring 2025 Global Economic Prospects’.

The report mentioned that these direct effects are being compounded by a volatile and unpredictable policy environment, as frequent changes to announced tariffs have made it harder for businesses to plan and invest.

Meanwhile, US economic growth is expected to stall this year, with average annualised growth projected to slow from 2.5 per cent in 2024 to just 0.1 per cent in 2025, as per PIIE’s non-resident senior fellow, Karen Dynan.

Inflation in the US is projected to peak at around 4.5 per cent later this year and unemployment to rise to a bit above 5 per cent before improving in 2026. Financial markets have responded negatively to recent policy changes, although hard data on spending and employment remain relatively strong. This resilience may partly reflect a shift in timing, with households and businesses bringing forward purchases in anticipation of higher prices.

Other recent policy actions are adding to the drag on the US economy. Federal layoffs and operational disruptions tied to the new Department of Government Efficiency are reinforcing uncertainty without meaningfully improving the fiscal position. A large fiscal legislative package expected later this year also is likely to do little to reduce the Federal budget deficit relative to current policies, added the report.

Canada and Mexico are being hit hard by new US trade actions. Mexico faces added challenges from weaker economic fundamentals and anticipated revisions to the terms of the US-Mexico-Canada agreement (USMCA)—though movement of some production to Mexico from other countries may offer some offsetting benefits. In Europe and the United Kingdom, moderate growth is expected, with the euro area supported by coordinated debt issuance and increased defence spending, as per the report.

In China, economic growth is expected to fall well short of the government's 5 per cent target. Structural challenges, fragile consumer sentiment, and heightened tensions with the United States are all weighing on the outlook, while fiscal and monetary stimulus have so far had only limited effect.

Elsewhere in Asia, prospects vary widely and remain highly sensitive to further developments in trade policy. Many economies are exposed to the risk of additional US tariffs. India, however, continues to attract foreign investment and remains a regional bright spot.

There are still significant risks to the outlook. The likelihood of a US recession within the next 12 months is now estimated at 40 per cent. Several factors could exacerbate the current slowdown, including a deeper correction in the equity markets, rising interest rates due to fiscal concerns, or further monetary tightening if inflation expectations become unanchored. Any additional weakness in the US economy would have a substantial impact on global growth, especially for US trading partners.

The report concluded that the outcomes could also turn out better than currently projected if policy shifts. A meaningful reversal of recent tariff hikes would relieve some of the inflationary pressure and help restore business confidence. Coupled with continued advances in artificial intelligence, deregulation, and investment incentives, such a change could support stronger productivity growth.

Fibre2Fashion News Desk (SG)