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World Economic Prospects

Each month Oxford Economics’ team of 300 economists updates our baseline forecast for 200 countries using our Global Economic Model, the only fully integrated economic forecasting framework of its kind. Below is a summary of our analysis on the latest economic developments, and headline forecasts. To access the full report (and much more), request a free trial today.

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Higher tariffs set to trigger a sharp global slowdown

• We’ve cut our world GDP growth forecasts by 0.3ppts to 2.3% in 2025 and by 0.5ppts to 2.3% in 2026 due to the substantial, albeit scaled back, US tariff hikes. Every economy is a loser from the US’s dramatic policy shift. But the US slowdown will be especially acute, and those economies with strong US trade links and facing high tariffs will also perform worse than average.
• Our baseline forecasts are conditional on US tariffs on the rest of the world being maintained at 10%, with three exceptions. We assume the average effective tariffs on Canada and Mexico will be a little bit higher at 13% and 15%, respectively, but are expected to fall below 2% when a new USMCA trade deal is negotiated next year. We believe China’s tariff will remain above 100%. Still, the path is highly uncertain and there are upside and downside risks.
• We now expect the US economy will grow by just 1.2% this year and 1.6% in 2026, which means that by the end of next year the level of GDP is anticipated to be almost 2% lower than we expected a month ago. In addition to the real income squeeze from tariffs, consumer spending and investment will be dented by the asset price sell-off and continued heightened policy uncertainty. Activity could also be hit in the short term by supply chain disruption associated with the sudden and unexpectedly broad and sharp rise in tariffs.
• While the US is set to face a combination of supply and demand shocks, the rest of the world will be hit by a more conventional external demand shock. Those economies with strong trade links with the US and facing particularly sharp tariff hikes will be hit especially hard. The key exception is China, as we expect policymakers there will be more proactive in delivering stimulus measures to counter the hit to growth from higher tariffs (Chart 1).
• A broader contraction in global trade beyond that caused by weaker US imports is inevitable as the tariff impacts ripple through global supply chains. This will be exacerbated by households and businesses limiting spending in response to heightened uncertainty and the plunge in global asset prices, meaning that even economies that are relatively economically isolated from the US will face an economic slowdown.
• By mid year, we expect US core PCE inflation to climb to around 4.5%. As the one-off price hikes fall out of the calculation, inflation should fall below 2% next year. Elsewhere, any inflationary effects from tariffs on US imports are unlikely to trigger a material bump in consumer prices. The risk of supply chain disruption will also be lower outside the US. Accordingly, we expect lower commodity prices and the weaker economic backdrop will limit inflationary pressures.
• We are circumspect that the Federal Reserve will begin cutting policy rates mid-year as the market still expects. The absence of a US recession in our baseline forecast and lingering concerns that imminent policy easing might result in a less transitory rise in inflation will prompt the Fed to tread cautiously with respect to rate cuts. We anticipate only one rate cut this year in December, followed by a series of cuts in 2026.

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