A sharp escalation in US tariffs has jolted global markets, fueling fears of a broader economic downturn. In response, S&P Global Ratings has revised its macroeconomic outlook, warning of slowing GDP growth, rising US inflation and mounting recession risks. The ripple effects from April’s sweeping trade measures are starting to crystallise with significant consequences for the global economy.
“The jump in US import tariffs, trading partner retaliation, ongoing concessions, and subsequent market turbulence constitute a shock to the system centred on confidence and market prices. The real economy is sure to follow, but by how much?” said Paul Gruenwald, Global Chief Economist at S&P Global Ratings.
S&P Global has downgraded GDP forecasts across most regions and raised its US inflation outlook, citing growing downside risks and heightened uncertainty. “We have again lowered our GDP growth forecasts for most countries and raised our inflation forecast for the US,” said Gruenwald.
While a US recession is not currently projected, the risk profile has worsened. “The risks to our baseline remain firmly on the downside in the form of a stronger-than-anticipated spillover from the tariff shock to the real economy,” he added.
Global growth is now forecast to be 0.3 percentage points lower in 2025 and 2026. The regional breakdown includes:
- US GDP: down 60 basis points (bps) over 2025-2026.
- Canada and Mexico: similar declines.
- Eurozone: 0.2 percentage points lower; Germany hit hardest.
- China: 0.7 percentage point drop in 2025–2026.
- Japan and India: reductions of 0.2–0.4 percentage points.
- Emerging Asia-Pacific (e.g., Malaysia, Vietnam, Thailand, Singapore): declines of 0.5–1.0 percentage points per year.
Historic tariff levels and global fallout
The April 2 announcement introduced a 10% flat tariff and a variable tariff based on trade deficits. The effective US tariff rate has surged to about 24% — the highest since the Smoot-Hawley era of the 1920s. Retaliation varied: China responded aggressively, resulting in mutual tariffs of 145% and 125%, while the EU and Canada paused action amid ongoing negotiations.
The report outlines three likely trajectories: continued confrontation with China, a complex standoff with the EU, and measured negotiations with most others. Canada is expected to adopt a firmer stance under its current government.
United States outlook
US GDP is forecast to grow just 0.9% year-on-year in Q4 2025. Domestic demand will crawl below 1% throughout the year. Core CPI inflation will rise to 4.0%, with core PCE at 3.6%. The Fed is projected to cut rates by 50 bps in 2025 but is expected to tread carefully given lingering inflationary pressures.
Europe’s mixed resilience
Eurozone growth will slow by 0.2% annually through 2026, with Germany and Italy most affected. Targeted US tariffs on steel, autos, and pharmaceuticals could cost the region 0.4% in cumulative GDP. Fiscal stimulus in infrastructure and defense could help cushion the blow, and growth is expected to rebound above potential in 2027–2028. The ECB is likely to cut rates once more in June, followed by a pause.
Asia-Pacific hit hardest
China’s growth forecast is revised down to 3.5% in 2025 and 3% in 2026, with exports to the US set to fall by more than 5% in 2025 and over 6% in 2026. Domestic policy support is expected to partially offset declines in investment and consumption. Elsewhere in Asia-Pacific, higher tariffs and reduced Chinese demand will weigh heavily on export-driven economies.
Emerging markets outlook
Most emerging markets, except Mexico, are relatively insulated due to limited direct exposure and smaller US trade surpluses. Central banks in Latin America and other EM regions are expected to cut rates more aggressively, helped by stronger currencies and falling oil prices, which should help reduce inflation.
