Washington, DC—The global economy remains on track to grow this year, but the outlook has deteriorated significantly in recent months. Major policy shifts in the United States—particularly the introduction of new tariffs—are weighing on activity and fueling a high level of uncertainty across economies.
The Peterson Institute for International Economics (PIIE) today announced its Spring 2025 Global Economic Prospects, projecting real global GDP to increase by just 2.7 percent in 2025 and 2.8 percent in 2026, down from a 3.2 percent gain last year. US tariffs are raising prices, disrupting supply chains, and eroding real incomes. 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.
US Economic Performance
US economic growth is expected to stall this year, with average annualized growth projected to slow from 2.5 percent in 2024 to just 0.1 percent in 2025, Karen Dynan, PIIE nonresident senior fellow, said. Inflation is projected to peak at around 4.5 percent later this year and unemployment to rise to a bit above 5 percent before improving in 2026. Financial markets have reacted negatively to recent policy changes, though hard data on spending and employment remain relatively firm. That resilience may reflect, in part, a shift in timing as households and businesses pull 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.
Outside the United States, the picture is mixed
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 defense spending.
In China, economic growth is expected to fall well short of the government's 5 percent 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.
Risks to the outlook
Significant risks to the outlook remain. The probability of a US recession over the next 12 months is now estimated at 40 percent. Several factors could amplify the current drag, including a deeper equity market correction, rising interest rates driven by fiscal concerns, or renewed monetary tightening if inflation expectations become unanchored. Any additional weakness in the US economy would weigh heavily on global growth, particularly for US trading partners.
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.
Rearmament: Reasons, Feasibility, Challenges, and Implications
Jacob Funk Kirkegaard, nonresident senior fellow, discussed how Europe, including both EU and non-EU members, have initiated an urgent rearmament drive in the face of a "two-front confrontation" of ongoing Russian military aggressions against Ukraine and the perceived gradual reduction in the credibility of the traditional US security guarantee in NATO.
Kirkegaard analyzed how European nations together with Ukraine's army possess the capacity to deter Russia in the future, but this requires Ukraine's full integration into the EU and that European nations integrate and consolidate their armaments purchases and production capacities. The key will be for European defense producers to achieve adequate economies of scale in weapons production. Ukraine will likely, as part of this process, emerge as Europe's largest weapons producer.
International Trade
Chad P. Bown, Reginald Jones Senior Fellow, provided an update on the US tariff actions through the first few months of the second Trump administration. These include new tariffs on China, an escalation of tariffs on steel and aluminum, new tariffs on imports from Canada and Mexico and on autos, and the major tariff announcement of April 2 of a baseline 10 percent tariff against all countries, plus a top-up tariff on imports from countries that run a trade surplus with the United States.
Bown put the magnitude of these tariff increases into recent and longer-run historical context, and he also described ways in which key trading partners have responded to date. Finally, he identified key channels through which these tariffs are likely to impact trade flows, prices, and supply chains around the world
Media Contact
Carlos Gomez, PIIE Media Relations and Outreach Director, [email protected]
@piie.com
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About PIIE
The Peterson Institute for International Economics is an independent nonprofit, nonpartisan research organization dedicated to strengthening prosperity and human welfare in the global economy through expert analysis and practical policy solutions.