International economic outlook: Tariffs and trade-related developments remain top of mind

Summary

Forecast changes

• The initial “Liberation Day” tariffs were more severe than expected, and despite a temporary rollback of most tariffs (ex-China), global growth prospects have once again diminished. New tariffs, particularly elevated tariffs on China, will apply downward pressure on global economic activity. We now forecast the global economy to grow just 2.3% this year. Risks to our global growth forecast remain tilted to the downside, and the possibility of technical global recession remains elevated.
• Economies particularly exposed to tariffs should underperform. In that sense, we now believe Canada's economy will enter technical recession this year. We continue to believe Mexico's economy will enter recession this year, and revised our GDP outlook to reflect our view that Mexico's economy will contract on an annual basis in 2025. We also made a notable forecast revision to China, and believe tariffs and other structural imbalances will result in China's economy growing just over 4% this year.
• Central banks, particularly in the G10, are likely to turn more dovish in response to tariffs. We believe dovish tilts will materialize from the European Central Bank and Bank of Canada and that the Bank of Japan will become less hawkish. Emerging market central banks will likely be more cautious; however, FX strength, lower energy prices and subdued growth prospects may create monetary policy space for institutions in the developing world to also pursue more easing, or initiate easing cycles.
• We expect the U.S. dollar to rebound in the immediate period ahead, given our view that recent dollar depreciation is tactical and not a structural wholesale shift away from dollar-denominated assets. Over the second half of 2025, we expect the dollar to move sideways as the Fed cuts rates and the U.S. economy softens; however, over the course of 2026 we expect trend dollar strength to reappear.

Key themes

• Tariffs and trade-related developments remain top of mind. Liberation Day prompted extreme market volatility, atypical moves across U.S. financial markets, and will likely generate new downward pressure on global economic activity. Tariff policy remains extremely fluid, and while we expect “trade deals” to be made going forward, the global economy will likely remain close to entering technical recession in 2025 and 2026.
• Central banks are in a difficult position as a result of tariffs, particularly the Fed. Tariffs are likely to be inflationary but also push U.S. growth prospects lower. With the Fed's mandated goals in tension, we believe the FOMC will opt to support the labor market and defend against recession by cutting interest rates 125 bps by the end of this year. G10 central banks are likely to ease as well, although emerging market policymakers may choose a more cautious path for monetary policy.
• Tariffs and the subsequent market volatility have placed depreciation pressure on the U.S. dollar. While the dollar has performed unusually for an environment defined by global policy uncertainty and financial market volatility, we believe recent moves in U.S. financial markets are temporary. The U.S. dollar will remain the world's reserve currency for the foreseeable future, in our view, and we expect the dollar to regain traction going forward and strengthen on trend into 2026.

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