National Institute Global Economic Outlook – Summer 2025 – Summary

We forecast that global GDP growth will fall noticeably in the coming years. Global economic activity has been gradually slowing since the post–pandemic recovery in 2021. This slowdown has been exacerbated by President Trump's tariff policies, which are expected to adversely affect global economic growth, particularly the outlook for the United States, Canada and Mexico. Overall, we expect the global economy to grow by 3 per cent this year, one of the weakest growth rates since the Global Financial Crisis in 2009, excluding the pandemic–hit year of 2020. As most of the tariff changes will take effect in the second half of this year, the precise timing of their adverse effects is uncertain. However, we expect global growth to slow to 2.9 per cent in 2026. Since the pandemic, economic growth in advanced economies has been largely driven by the United States, while the Euro Area has underperformed. We forecast that US GDP growth will slow markedly from 2.8 per cent in 2024 to 1.6 per cent this year, contributing to weaker growth among advanced economies as a whole. This outlook is subject to considerable uncertainty because of the possibility of further tariff increases, including from retaliation, which pose a downside risk to our forecast. The uncertainty comes from the tariffs themselves, the uncertainty they create for production and investment decisions, and also from the possibility of retaliatory tariffs. 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. Headline inflation rates have fallen towards target rates in most advanced economies, but the new tariffs threaten higher inflation. While inflation is almost at target in the Euro Area, US inflation is expected to remain elevated with the pass–through from higher import tariffs and depreciation of the US dollar. We forecast that OECD annual inflation (excluding Turkey) will fall from 3.2 per cent in 2024 to 2.6 per cent in 2025 and 2 per cent in 2026. We think that interest rate cuts have come to an end in the Euro Area but expect two cuts from the Federal Reserve (Fed) this year, followed by further easing next year. Rising inflation expectations are likely to keep the Fed cautious in the near term. However, we expect a more dovish stance to emerge, facilitated by the change in Fed leadership due next year. Despite historically high levels of public debt, budget deficits are likely to remain high in advanced economies. With the passage of President Trump's 'One Big Beautiful Bill' and the need for increased defence spending by NATO countries, we expect fiscal policies to remain supportive despite high current levels of public debt in advanced economies.