Growth to flag but not fail as tariffs begin to bite

We forecast a soft H2 in 2025 will be followed by lacklustre growth in 2026 – around 2.5% in both years. This is far from disastrous, though it will be the two weakest years of growth since 2009 excluding 2020.

What you will learn:

• Despite the huge uncertainty created by US tariffs, there’s a growing sense that the global economy and financial markets may be able to live with them. Overall, we expect that the broad impact of higher tariffs on the global economy will be muted and mitigated by supportive fiscal – and to a lesser degree monetary – policy, especially in the US and China.
• Still, the malign effects of tariffs via their squeeze on US households’ real incomes and weaker capital spending as a result of greater uncertainty are only just beginning to be felt.
• US President Donald Trump’s tariffs herald an era of more fractured trade and greater protectionism, but this is only part of a more general shift in economic policy as governments adopt more activist fiscal policy.
• Greater use of expansionary fiscal policy may make it tougher for central banks to keep inflation close to target, particularly if geopolitical forces and climate change result in more supply shocks than in the first two decades of the century.
• This increases the risk of shorter stop-start economic cycles, in sharp contrast to the long economic cycles of the 1990s and early twenty-first century. Meanwhile, higher debt burdens and greater economic volatility should prompt term premia on long-term governments bonds to climb.