By Dr. Paul Gruenwald, Chief Economist, S&P Global Ratings
S&P Global Ratings released its quarterly global economic outlook for the third quarter (Q3) of 2025 in late June. Not surprisingly, the uncertainties surrounding US economic policies, especially those related to trade, figured prominently in the report. But other factors, too, are shaping the outlook for the coming months.
Key takeaways
- US policy unpredictability, led by tariffs, continues to cloud the global macro picture. Deals with Japan and the European Union (EU) have been announced recently, but many questions remain.
- Activity is generally holding up; consumption remains firm, and labor markets remain tight.
- Market volatility has fallen as tariffs have been partially paused, but government bond yields have risen, mainly on debt worries; many central banks continue to gradually ease policy rates.
- Our growth numbers are broadly unchanged from our last quarterly update, although policy unpredictability implies unusually wide confidence bands.
- Risks remain on the downside, with the recent military escalation between Israel and Iran adding to the tariff-uncertainty mix.
As import tariffs imposed by the new administration under President Donald Trump reach levels not seen in decades—and then suddenly pause—producers, consumers and financial markets struggle to adjust.
Unpredictable US trade policy remains front and center in the global macro picture. As import tariffs imposed by the new administration under President Donald Trump reach levels not seen in decades—and then suddenly pause—producers, consumers and financial markets struggle to adjust. These shocks to the system come on top of an ongoing recalibration of supply chains and industrial policy as geopolitical tensions remain high. Globalization continues to evolve as the Washington Consensus gives way to a new order that has yet to be fully defined.
Moving quickly out of the starting blocks, the second Trump Administration imposed substantial tariffs on virtually all trading partners before partially pausing them until early July. The last quarter also saw a short-lived trade conflict with China, with both sides escalating tariffs to over 100 percent. That bilateral episode was paused and then unwound, with a subsequent six-month patching up. In late July, trade deals were announced with Japan and the European Union, although details are lacking so far.
Markets have calmed following a volatile first half of the year. Driven by abrupt changes in US tariff policy—both actual and threatened—markets have seesawed but have subsequently moved higher. The general pattern has been a sharp decline following a tariff escalation, followed by a sharp rebound following a tariff pause. Measures of market volatility have fallen as tariffs were paused, but measures of policy uncertainty remain elevated (see Figure 1).
Our high-level narrative for the “Big 3” economies was dominated by tariff developments.
- United States: Output contracted fractionally in the first quarter as imports surged in an effort to front-run tariffs. Consumption growth slowed but remained above 1 percent, in contrast with ongoing weakness in “soft data” second-quarter gross domestic product (GDP) growth rebounded to 3 percent as the trade policy induced distortion largely unwound.
- Eurozone: GDP rose significantly by 2.5 percent annualized during the first quarter of 2025. Slightly less than half of this growth resulted from net exports, helped by Ireland’s front-running of pharmaceutical exports to the US ahead of potential tariffs. These trade flows started to reverse in April 2025. Domestic demand is slowly strengthening.
- China: The resilience of its growth in the first half of 2025 was helped by robust exports, partly due to a temporary frontloading of shipments to the US. Domestically, although housing sales are close to stabilizing, housing construction continues to slide. That construction weakness will weigh on investment even as consumption growth improves steadily.
First-quarter data for national accounts was distorted by the front-running of tariffs. Generally, net-importer countries saw a decline in growth while net-exporting countries saw a spike in growth. As an example of the former, US growth declined in the first quarter as net exports subtracted four percentage points from growth (due to the surge in imports), which was only partially offset by inventory accumulation (see Figure 2). For the latter, a number of export-led economies, such as China and Ireland, saw healthy pickups in growth as shipments rushed to beat the tariffs, which were at least partially met by new production rather than inventory depletions. These anomalies unwound in the second quarter when US GDP growth jumped to 3 percent, with consumption growth slowing further to just over 1 percent. Given the volatility of the quarterly data, we will look at the first half of the year as a whole.
Labor markets in advanced economies remain tight, although the churn has diminished. Unemployment rates continue to be low by historical standards as the consumer-labor demand nexus remains firm. The 4.2-percent rate in the US is below trend and is near our estimate of the neutral rate. In the eurozone, the 6.7-percent rate is at an all-time low despite the economy exiting a borderline recession. The churn in the labor market has decreased as both hiring (due to slower demand) and firing (due to firms holding on to workers following the post-pandemic dislocation) have declined. Labor-market strength is therefore on a narrower footing.
Bond yields rose after the election, but they have since gone sideways. This reflects multiple factors. US fiscal policy following the passage of the Big Beautiful Bill looks to be even more expansionary than it was under the previous administration of Democratic President Joe Biden. This has spooked the markets and pushed yields higher. The benchmark 10-year Treasury yield climbed to over 4.6 percent in late May before partially retracing its path, with knock-on effects on other sovereign yields. In the eurozone, higher yields reflect a reflation view, with rising fiscal spending on infrastructure and defense, mainly from Germany, in the pipeline.
Tariffs will give at least a temporary boost to inflation, especially where the pass-through to final consumers is high or inflation expectations are less well anchored. While this is mostly a price-level effect rather than an inflation-rate effect, the path back to 2-percent inflation targets for central banks will be more complicated. For whatever reason, higher rates translate into tighter monetary and financial conditions.
Central banks have continued to cautiously lower rates since mid-2024. These moves reflect lower inflation pressures stemming from stronger local currencies (which lower import prices) as well as lower oil prices. The absence of any pass-through of higher tariff rates so far has also contributed to this outcome.
Since our last report, the trend of modest rate cuts that began in mid-2024 has persisted, with the notable exception of the US Federal Reserve (the Fed). All downward moves by central banks in advanced countries in the second quarter of 2025 were by 25 basis points. The European Central Bank (ECB) cut rates twice, while the Bank of England (BoE), the Bank of Canada (BoC) and the Reserve Bank of Australia (RBA) each cut once. The Swiss National Bank (SNB) cut rates to the zero lower bound. Policy rate cuts were more aggressive in emerging markets, including a surprisingly large cut of 100 basis points (bps) in India.
The escalation of the Israel-Iran military conflict in June has partly reversed the market effects of US tariffs. Pre-conflict, disinflation pressures were growing on two fronts. Oil prices were falling, lowering overall inflation pressures, particularly in emerging markets where their weights in consumption baskets are higher. Also, the weakening of the US dollar and strengthening of local currencies were lowering import prices. Both of these provided additional scope for central banks to lower policy rates. With the escalation of the conflict, the DXY/U.S. Dollar Index halted its year-to-date decline, while the price of WTI (West Texas Intermediate) crude oil rose by as much as 30 percent to $75 per barrel as of late June. It has since fallen back into the $60-to-$70 range.
Updated GDP growth forecasts
Our growth forecasts are little changed since our previous round for most countries. But the world GDP growth rate for both 2025 and 2026 is 30 bps higher than previously, at 2.9 percent.
In advanced economies, we now see slightly higher growth in the United States this year (at 1.7 percent) as tariff-related impacts look weaker than previously estimated. Elsewhere, our forecasts for Canada, the eurozone, the United Kingdom and Japan are largely unchanged.
We did raise some of our growth forecasts for emerging markets. We now see China’s growth as meaningfully higher with extreme tariff fears easing. We lifted our forecasts by 80 bps to 4.3 percent for 2025 and by 100 bps to 4.0 percent for 2026. We raised Brazil’s growth by 40 bps to 2.2 percent for this year. We also increased our forecasts for India and Mexico, but we lowered our forecast for South Africa.
Downside risks are piling up
Our top risk is that the current tariff calm is only temporary.
Our top risk is that the current tariff calm is only temporary. The US tariffs rolled out on April 2, 2025, were scheduled to remain on hold until early July. And the triple-digit bilateral China tariffs are on hold for six months, reflecting a recent agreement on a few specific bilateral restrictions. A flurry of trade agreements – including with Japan, the EU, India and South Korea – were announced in late July. These featured higher-than-expected baseline tariffs of 15 percent or higher, but key details were lacking, especially regarding investments into the US.
Markets reacted very negatively to the imposition of these tariffs and very positively to their pauses. Our read is that the market recovery reflects a view that the pauses will evolve into more permanent agreements. That outcome is by no means guaranteed.
A crack in the consumer spending–labor demand nexus remains a key risk. As we argued in recent reports, the resilience of this nexus continues to surprise us. As noted above, unemployment remains low, but the market churn has narrowed. There are fewer jobs on offer, but firms are also holding on to workers, reportedly because of their difficult experiences in finding labor as the pandemic retreated. Recent modest weakening in markets could accelerate if demand softens further.
A spike in financial stress is another downside to our forecasts. The recent rise in government bond yields is a reminder that market reactions in the face of deteriorating debt-sustainability metrics may no longer be quiescent. For example, the 5-year credit default swap (CDS) rate on US government debt spiked to nearly 60 bps following the April 2nd tariff announcements before dropping to 44 bps in June, which is still above the LT (long-term) average. More aware bond markets also raise the specter of a failed auction, which could put further stress on yields and spike market volatility. These, and the knock-on effects of more generalized market responses closer to a sharp rise in risk aversion, could have real effects.
An escalation of the Israel-Iran conflict also threatens our baseline. Despite the hostilities and loss of life so far, the market reaction has been muted. Most of the action has taken place in energy markets, with the price of oil rising to the mid-$70 range. While this is up sharply from recent lows, it has returned to the mutual comfort zone of both consumers and producers. Any escalation in the spread of the conflict risks a sharp spike in prices, which will also risk demand destruction (as funds for non-oil spending drop), raising downside risks to growth.
Tariff volatility leaves macro money on the table
The outlook will remain under pressure as long as policy unpredictability persists. As a general proposition, US tariff policy is either pausing or slowing investment spending. This includes investments in long-dated projects, slower consumer spending on big-ticket items and crimped markets for speculative-grade credits, as well as mergers and acquisitions (M&A).
The ups and downs of market-risk measures, such as those provided by the VIX (CBOE Volatility Index), put a further damper on demand. Wait and see is not good for demand. The longer this lasts, the larger the downside risks to macro outcomes.
Tariff-policy drama is also blunting upside-growth potential. Supply-side reforms have the potential to increase trend growth but remain in the background. Permitting and other ease-of-doing-business reforms are largely being postponed or are overwhelmed by policy uncertainty. Artificial intelligence (AI) could provide a boost to growth, but those effects risk being stretched out as well. Again, with tariff risks sucking all the oxygen out of the room, those upside benefits to growth are left on the table.
References
S&P Global Ratings: Economic Outlook U.S. Q3 2025: Policy Uncertainty Limits Growth, 24 Jun 2025
S&P Global Ratings: Economic Research: Economic Outlook Eurozone Q3 2025: Strength From Within, 24 Jun 2025
S&P Global Ratings: Economic Outlook Asia-Pacific Q3 2025: Resilience May Vary, 23 Jun 2025
S&P Global Ratings: Economic Outlook Emerging Markets Q3 2025: Tariffs’ Direct Impact Is Modest So Far, But Indirect Effect Will Feed Through, 24 Jun 2025
Dr. Paul Gruenwald is Chief Economist at S&P Global Ratings and a member of the World Economic Forum’s (WEF’s) Chief Economist Group. He previously served as Asia-Pacific Chief Economist at ANZ and spent 16 years at the International Monetary Fund (IMF) in senior roles, including Deputy Chief of the China Division. He also advises the University of Texas at Austin. Dr. Gruenwald holds a Ph.D. in Economics from Columbia University and a Bachelor of Arts from the University of Texas.