GLOBAL ECONOMY

Dark clouds hang over global economy amid tariff tensions

A rising wave of tariffs and counter-tariffs, coupled with persistent policy uncertainty are casting a long shadow over the global economic outlook. Measures of trade-policy-related uncertainty have surged to record levels, and business sentiment is weakening. The trade standoff between the United States and China has the potential to snarl supply chains, reduce trade flows, and lower economic growth.

“This tit-for-tat approach between the world’s two largest economies – whose bilateral trade accounts for roughly 3% of global trade – carries wider implications that could severely damage the global economic outlook,” said Dr. Ngozi Okonjo-Iweala, director-general of the World Trade Organization. “Our assessments, informed by the latest developments, highlight the substantial risks associated with further escalation.”

SHIFT IN GROWTH NARRATIVE

Surveys such as S&P Global’s Purchasing Managers Indices (PMIs) are now indicating a notable loss of global growth momentum. Reflecting this shift, S&P Global’s latest global real GDP growth forecast for 2025 has been revised downward to 2.5%, marking what would be the weakest growth performance since 2009, excluding the exceptional impact of the COVID-19 pandemic.

A modest rebound is expected in 2026, with growth projected at 2.7%, primarily driven by new fiscal stimulus measures in Europe. However, these projections carry significant downside risk, particularly if the US administration maintains its current policy trajectory.

The sharpest downward revisions in growth expectations for 2025-2026 are concentrated in the Americas. In the United States, several recent data points suggest economic activity in the first quarter of 2025 is weaker than earlier estimates had anticipated. The outlook is further clouded by additional federal job cuts and the imposition of steeper import tariffs – factors that are expected to weigh heavily on short-term growth.

Alongside these developments, S&P also revised its inflation forecast for the US upward for 2025. As a result, the Federal Reserve is now expected to maintain current interest rates for most of the year. While futures markets continue to anticipate earlier rate cuts, such moves would likely only materialise in the event of a more pronounced downturn than currently expected.

In contrast, developments in Europe, particularly in Germany, are offering a rare source of optimism. The long-standing belief that Europe’s policymakers require a crisis to act appears validated by recent shifts in fiscal policy.

Germany’s move to boost defence spending and embrace fiscal stimulus marks a significant departure from its historically conservative stance. These changes have prompted an upward revision in eurozone growth forecasts from 2026 onward, though the optimism is tempered by a lack of detail in proposed plans and expectations of tighter-than-anticipated monetary policy. A stronger euro is now forecast as a result, which could complicate growth prospects further. Meanwhile, the threat of new US tariffs on European Union exports remains a source of tension.

BUSINESS SENTIMENT

S&P Global’s PMI surveys continue to point to softening global growth. The global composite output index, which tracks overall real GDP growth, dropped to its lowest level in over a year this February. Declining order volumes and reduced backlogs of work suggest additional weakness ahead.

Although the manufacturing sector has shown signs of stabilisation, recent improvements may be misleading, with companies potentially ramping up production early to avoid future tariffs. February’s country-level PMI data showed some notable shifts: momentum fell sharply in the US, Canada slipped further into contraction, and China’s data remained lacklustre.

Inflationary pressures are also returning. While supply chain indicators remain generally stable, manufacturing price indexes from February’s global PMIs showed upward movement, likely due to the widespread introduction of new tariffs. If services inflation – previously in a downward trend – shows signs of levelling off or rising again, it could complicate prospects for monetary easing. Since the 2024 US elections, consumer price inflation forecasts for 2025 have been raised across most major economies.

“Business and consumer sentiment have weakened in some countries. Inflationary pressures continue to linger in many economies,” the OECD said in its latest report on the global economy.

If bilateral tariffs are raised further on all non-commodity imports into the United States with corresponding increases in tariffs applied to non-commodity imports from the United States in all other countries, global output could fall by around 0.3% by the third year, and global inflation could rise by 0.4 percentage points per annum on average over the first three years, the OECD estimates.

“The impact of these shocks would be magnified if policy uncertainty were to increase further or there was widespread risk repricing in financial markets. These would add to the downward pressures on corporate and household spending around the world,” according to the OECD.

On the upside, agreements that lower tariffs from current levels could result in stronger growth, the organisation noted.