International economic outlook: Reduced tariff tensions and firmer global growth have contributed to changes

Summary

Forecast changes

• We have adjusted our forecasts to reflect improved global growth prospects as tariff tensions have deescalated. We now forecast global GDP growth of 2.5% for 2025 and 2.4% for 2026, slightly stronger than the 2.3% we forecast for both years a month ago. Much of the global growth revision reflects a more constructive outlook for China's economy.

• Reduced tariff tensions and firmer global growth have contributed to changes in our global monetary policy outlook. We are less dovish on G10 central bank policy, including less or later easing for the Bank of Canada and Norway's central bank. We are more dovish on emerging market central bank policy. We see more rate cuts from central banks in India and Chile, and less monetary tightening from Brazil's central bank.

• We continue to expect overall U.S. dollar appreciation over our forecast horizon, albeit at a more gradual pace than previously. We still see the second half of 2025 as likely the most challenging period for the greenback and expect the yen to strengthen more than previously envisaged. The U.S. dollar should gain modestly in 2026 as the U.S. economy recovers. That said, we see less weakness in the Canadian dollar and Australian dollar than previously forecast.

Key themes

• Following the shock of Liberation Day tariffs in early April, trade and tariff tensions have deescalated over the past several weeks. Most countries saw temporary tariff relief from early April, while more significantly, the U.S. and China agreed to temporarily reduce tariffs earlier this month. The real economic effects from temporary tariff reduction and the improvement in sentiment suggest a more orderly global GDP growth slowdown to 2.5% this year and 2.4% next year. China, Canada and the United Kingdom are among the countries where we expect more resilient economic activity than previously.

• Reduced trade tensions and more resilient global activity are likely to have differing implications for central bank monetary policy. We view G10 central banks as more likely to respond to improved growth prospects with less-dovish monetary policy. To that point, we see more gradual easing from central banks in Norway and Canada, while we also see a diminished likelihood of accelerated easing from the Bank of England and European Central Bank. For emerging economies, more stable local financial markets and currencies could allow for more dovish monetary policy. We expect more forceful rate cuts in India and Chile, and fewer hikes in Brazil.

• As tariff tensions ease and financial markets recover, the U.S. dollar has staged a modest recovery. Although markets have returned closer to normal functioning, some further deescalation in tensions or trade agreements could see the greenback's rebound extend further. We still view the second half of 2025 as the most challenging period for the U.S. dollar, given our outlook for a U.S. growth slowdown and Fed easing. However, we expect a trend of U.S. dollar appreciation to resume next year as U.S. activity rebounds and Fed easing comes to an end.

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