World Economy Summer 2025: Trade policy headwinds - Slower expansion

The outlook for the global economy continues to be weighed down by high uncertainty surrounding economic policy in the United States in general and aggressive tariff measures in particular. Although the threat of tariffs actually boosted economic activity at the beginning of the year, as shipments to the United States were brought forward, this demand will be missing in the coming months and add to the unfolding negative effects of tariffs on production. This forecast is based on the assumption that additional tariffs on imports to the United States will remain in place roughly at a level corresponding to the current prevailing rate. Monetary policy will be eased less than previously assumed in the United States, while in the euro area, it will be eased somewhat more. At the same time, fiscal policy is about neutral overall, although in the United States it is even expansionary. Against this backdrop, we expect a weaker expansion of the global economy. While the US economy is losing significant momentum and in China, despite economic policy stimulus, the economy is not gaining traction amid the deteriorating outlook for exports, the economy in Europe is likely to pick up slightly. Overall, we expect global output-measured on the basis of purchasing power parities-to increase by only 2.9 percent this year and next, after a rise of 3.3 percent last year. We have thus reduced our forecast by 0.2 percentage points both for this year and next compared to the March report. The decline in inflation has recently only made slow progress. While inflation is expected to rise again in the United States, the upward pressure on prices in the euro area is likely to gradually decrease further and, on average for this year and next, inflation rates will broadly be in line with the ECB's target rate.