International economic outlook

Summary

Forecast changes

• We continue to refine the tariff assumptions underlying our global economic and FX outlook, and we believe most tariffs will remain in place from Q2-2025 through the remainder of our forecast horizon. As far as the assumptions, we assume a 20% tariff on China and a 10% tariff on the European Union. We also assume effective tariff rates of 5% on Canada and Mexico (with some goods not subject to duties), and a 5% effective rate on the rest of the world. We also assume matching tariff retaliation from foreign countries on the United States.

• Our forecast for global GDP growth in 2025 in unchanged at 2.7%, although we revised our growth forecast for the U.S., Canada and Mexico lower. Downward revisions were offset by firmer economic outlooks for China and India, while we also made large upward revisions to our medium-term growth outlook for the Eurozone on the back of prospects for enhanced fiscal spending.

• We have made select adjustments to our monetary policy outlooks at certain central banks. We see more easing from the Federal Reserve and Bank of Canada, given softer growth outlooks, while we see less monetary easing than previously from the European Central Bank and Sweden's Riksbank. Softer U.S. growth and a more dovish Fed, along with a degree of tariff fatigue, is likely to result in less U.S. dollar strength than we previously anticipated.

Key themes

• While the outlook for tariff policy remains fluid, the broader contours are starting to come into focus. As a result, we have further refined our tariff assumptions this month. China and the European Union are likely to face tariffs over our entire forecast horizon, while many other countries—including Canada and Mexico—are also set to face higher tariffs from the United States. International countries are still likely to respond with matching tariffs that are likely to remain in place for the foreseeable future.

• The potential economic impact of the trade war is also becoming apparent. We have kept our 2025 global GDP forecast unchanged at 2.7% but raised our global growth outlook slightly to 2.7% for 2026. For the United States and Canada, we see slower growth and more dovish central bank monetary policy due to tariffs. At the same time, fiscal stimulus in Germany has improved the Eurozone's medium-term growth prospects and prompted a less dovish European Central Bank. Modest fiscal stimulus in China could also see a more gradual slowdown in China's economy.

• We expect an ongoing but lesser degree of U.S. dollar appreciation over our forecast horizon. The imposition of moderate tariffs and a degree of tariff fatigue could limit the extent of safe-haven support and trend U.S. dollar appreciation over the next several quarters. In addition, somewhat softer U.S. growth and a more dovish Fed could also lessen the U.S. dollar gains over the medium term, given growth, fiscal policy and monetary policy trends that in some instances are turning more supportive of foreign currencies.

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