National Institute Global Economic Outlook – Spring 2025 – Summary

Global GDP growth was 3.2 per cent in both 2023 and 2024, and we anticipated that 2025 would show similar growth in our Winter Global Economic Outlook. But President Trump's tariffs announced on 2 and 9 April have fundamentally changed the context for our Spring Global Economic Outlook. Global GDP growth is now expected to be around 2.9 per cent this year, one of the lowest growth rates since the turn of the century excepting the Global Financial Crisis in 2009 and the Covid-19 year of 2020. We expect that, absent other effects, the US tariffs will raise inflation and lower economic growth in a wide range of countries. Outside the United States, China and other East Asian manufacturing exporters, Canada and Mexico are likely to be the worst hit. Judging the scale and timing of the adverse effects is difficult but we expect global growth in 2026 to be slower than previously forecast too, at 2.8 per cent. In recent years, growth in advanced economies has been driven by the United States, while the Euro Area has underperformed. We forecast that GDP growth in the United States will slow markedly, and that the previously anticipated pick-up in growth in the Euro Area will be delayed. This outlook is subject to considerable uncertainty because of the possibility of further tariff increases, which poses downside risks to our forecast. The uncertainty comes not just from the tariffs themselves but also from the possibility of retaliatory tariffs and the possible scope for tariff changes as a result of negotiations. However, there are possible upside risks for growth if there were to be a significant number of trade agreements that reduced the proposed new tariff rates or created zero tariff deals. While headline inflation rates have fallen towards target rates in most advanced economies, underlying inflation rates have been slower to fall, and the new tariffs threaten higher inflation. We now forecast that OECD annual inflation (excluding Turkey) will fall to 2.7 per cent in 2025 (previously 2.3 per cent) and 2.2 per cent in 2026 (previously 1.9 per cent). Despite higher inflation, we still expect further interest rate cuts from the Federal Reserve (Fed) and the European Central Bank (ECB) this year, reflecting weaker economic activity. The ECB has cut its main policy rates three times this year, while the Fed has kept interest rates stable since December at 4.5 per cent. We expect the ECB to continue to be dovish this year, especially with growth in the Euro Area remaining weak, but the Fed to be cautious. We expect fiscal policies to remain supportive amid increased need for defence spending despite high public debt levels.