Global economic outlook: slowdown amid uncertainty

Due to trade tensions, rising bond yields and policy uncertainty, our 2025 midyear global outlook predicts slowing economic activity.

In brief

• Global economic activity is expected to maintain modest but uneven momentum, with GDP growth projected at 3.0% in 2025, down from 3.2% in 2024.
• Six themes to redefine the global outlook: policy uncertainty, financial shifts, inflation dynamics, fiscal policy, monetary policies and labor market changes.
• Business leaders should prioritize agility and shock absorption to build resilience amid economic volatility and supply fragilities.

Global economic activity is expected to maintain modest but uneven momentum. We project that global real GDP growth will decelerate to around 3.0% in 2025 and 2.9% in 2026, following a 3.2% advance in 2024, as rising trade frictions, persistent geopolitical and policy uncertainty, elevated market volatility, and inflation divergence reshape the global outlook. Regional growth patterns have become more fragmented, with developed markets losing steam and emerging markets showing varied resilience.

Global economic outlook: reshaping growth and strategy via six themes

The midpoint of 2025 finds the global economy in a precarious yet resilient state, navigating a volatile mix of macroeconomic headwinds and structural shifts. Momentum has broadly held, but growth trajectories are diverging more sharply across geographies and sectors. Mounting policy uncertainty — driven by a global reordering of trade relationships, financial market repricing and evolving fiscal priorities — is compounding the complexity of strategic planning. Businesses are operating in an environment marked by supply fragilities, inflation volatility and fragmented policy signals across central banks. In this update, we explore six global geoeconomic themes that are reshaping the outlook of the global economy.

1. Global reordering: policy-driven trade and geopolitical disruptions

Global trade is undergoing a profound transformation as policy becomes a disruptive force in shaping economic outcomes. The US administration’s sweeping tariffs on virtually all trading partners along with selective retaliation have reignited protectionist dynamics at a scale not seen in decades. The average US tariff rate surged from 2.5% at the end of 2024 to a peak of 29% in mid-April 2025, before easing to approximately 15% by early June following a reduction of China tariffs and temporary exemptions and exclusions.

Abrupt policy shifts have injected a persistent fog of uncertainty over global trade flows while legal challenges to the new tariff regime have fueled protracted uncertainty over implementation timelines, exemptions, and the durability of current policies. This prolonged ambiguity is proving as disruptive as the tariffs themselves.

Multinational firms are scrambling to adjust, delaying investment, reassessing supplier relationships and rerouting supply chains — all amid fluctuating cost structures and shifting market access. Financial markets have responded with heightened volatility as investors try to price in unpredictable and politically charged trade dynamics. The global repercussions are evident: input costs are rising, global trade volumes are slowing and traditional supply chain geographies are being reconfigured.

In parallel, governments are responding with defensive measures — from retaliatory tariffs to strategic subsidies — amplifying the fragmentation of the global trade system. This evolution marks a departure from the rules-based order toward a more transactional and politicized global economy. In this new era of policy-driven volatility, agility in global strategy, supply chain resilience and trade risk management will be critical for business leaders navigating a less stable and more fractured economic landscape.

Tensions in the Middle East — evaluated across three scenarios developed in collaboration with EY’s Geostrategic Business Group — introduce substantial risks for financial markets, energy prices, and global trade flows. An escalation could amplify volatility in oil and commodity markets and disrupt key trade chokepoints such as the Strait of Hormuz and the Suez Canal, triggering inflationary pressures, and posing serious challenges to global supply chains and economic stability.

2. Financial markets: repricing risk in a shifting landscape

Global financial markets are undergoing a fundamental shift, marked by the breakdown of long-standing correlations between asset classes. A striking example is the weakening of the US dollar despite rising Treasury yields — a decoupling that signals deepening investor unease about the US fiscal trajectory, rising public debt and escalating trade tensions.

This reassessment is prompting a broader repricing of risk. Dollar-denominated assets, once viewed as safe havens, are now being re-evaluated, triggering a pivot toward global portfolio diversification. The softer dollar, while supporting export competitiveness for many emerging markets, is also amplifying currency volatility and complicating central bank policy choices across other regions.

Meanwhile, equity markets appear to be pricing in a soft-landing scenario with surprising confidence, discounting the inflationary and growth-dampening effects of sustained tariff regimes. The persistence of policy-driven shocks — via trade, regulation and fiscal stimulus — is feeding into market dynamics that are increasingly disconnected from macroeconomic fundamentals. Against this backdrop, investors are adopting a more cautious and selective approach; reassessing asset valuations; and navigating a more fragmented, politically influenced global financial landscape.

3. Price volatility: inflation dynamics and supply chain fragilities

Inflation dynamics are being fundamentally reshaped by the resurgence of tariffs and the fragmentation of global trade. Unlike past episodes driven by demand booms or commodity cycles, today’s price volatility is increasingly policy induced — anchored in trade barriers that are redrawing cost structures and reshaping consumer prices.

For economies imposing tariffs, most notably the US, these measures are acting as significant supply shocks, sharply raising input costs in sectors reliant on imported goods. Tariffs are also distorting resource allocation, forcing firms to reorient supply chains and investment decisions based on political and policy risk rather than cost efficiency. This shift is undermining productivity, particularly in trade-intensive industries, and weakening long-term competitiveness by diverting resources away from higher-value uses.

Conversely, economies facing these tariffs — chiefly, major US trading partners — are confronting negative demand shocks. Reduced export volumes and elevated uncertainty are weighing on manufacturing activity, corporate revenues and employment. For these economies, the inflation effect moves in reverse: weakening demand exerts downward pressure on prices, amplifying disinflationary trends and, in some cases, raising deflation risks.

In essence, trade policy has become a key vector for global inflation, challenging the conventional playbook for businesses and central banks. As tariff regimes evolve, and as legal battles and geopolitical frictions prolong the uncertainty, business leaders will continue to navigate a volatile, asymmetric, deeply political global pricing environment.

4. Monetary policy: cautious recalibration amid uncertainty

Global monetary policy is becoming increasingly fragmented as diverging inflation paths force central banks to recalibrate around shifting domestic priorities. Rather than responding to traditional demand-driven cycles, policymakers are contending with a volatile mix of tariffs, subsidies and supply shocks that are distorting price signals and complicating the inflation outlook.

The Federal Reserve, after easing rates by 100 basis points in 2024, now faces a narrow policy path. Growth is softening, yet renewed inflationary pressure from tariffs and expansionary fiscal policy — both supply-side in nature — complicates the case for further rate cuts this year. The risk of holding rates too high for too long is rising. In Japan, the central bank is continuing its tightening cycle while the European Central Bank is tilting dovish, reacting to currency appreciation and subdued price pressures as well as bracing for the disinflationary impact of US tariffs. These divergent stances are amplifying exchange rate volatility, particularly as the US dollar weakens.

Central banks across emerging markets are approaching policy recalibration with caution, navigating a complex mix of domestic and external pressures. While inflation is broadly moderating, the policy response remains uneven. Some central banks are pausing or reversing rate cuts in response to fiscal concerns or inflation persistence, while others are cautiously easing to support domestic demand.

What ties these divergent approaches together is a heightened sensitivity to external volatility and risks. Tariff spillovers, geopolitical tensions and shifting capital flows are exerting growing influence over monetary decisions, prompting more defensive and risk-aware strategies.

5. Fiscal policy: navigating competing priorities

Fiscal policy is entering a more delicate phase as governments worldwide face mounting pressure to stimulate demand without undermining financial stability. In the US, the prospect of a widening fiscal deficit, driven by tax cut extensions and elevated interest costs, is raising alarms over debt sustainability. These dynamics are pushing long-term yields higher, with investors demanding greater compensation for rising fiscal and inflation risks. The result is a more challenging borrowing environment that risks crowding out private investment.

Across developed markets, fiscal policy is being pulled in multiple directions. Governments are under pressure to sustain investment in long-term priorities — such as infrastructure, digitalization and the energy transition — while contending with limited fiscal space and rising demands for near-term relief. In Europe, fiscal policy is moving toward greater flexibility. Germany has eased its debt brake to accommodate increased defense and infrastructure spending while, at the EU level, proposals like Readiness 2030 reflect a push for collective investment in security in response to reduced US engagement. These shifts are contributing to higher public borrowing needs and rising term premiums, placing upward pressure on long-term interest rates.

Emerging markets face stricter constraints. Elevated debt servicing costs, currency volatility and tighter global financing conditions are limiting fiscal headroom. Some, like India, continue to pursue targeted public investment to sustain growth, while others, particularly in Latin America, are grappling with investor concerns about fiscal discipline and long-term debt sustainability.

The broader risk across economies is the gradual erosion of fiscal space. As debt service burdens grow, the ability to fund growth-enabling expenditures is shrinking. The imperative now is to design fiscal strategies that are stimulative and sustainable, anchored in credible frameworks that support long-term productivity without undermining market confidence.

6. Labor in flux: scarcity, skills and AI-driven productivity

Global labor markets are undergoing a structural transformation as firms respond to cost pressures, demographic constraints and shifting technology frontiers. Across developed markets and emerging economies, businesses are doubling down on efficiency — prioritizing training, automation and the deployment of generative AI to manage labor costs and enhance productivity.

The integration of artificial intelligence (AI) and digital tools is becoming a critical strategy for competitiveness. In the US, productivity gains have remained resilient even as wage growth has cooled, reflecting stronger business investment and improved workforce efficiency. In Europe and Japan, the challenge is more acute, with aging populations and rigid labor markets slowing adaptation. Meanwhile, emerging markets, particularly in Asia, are investing in digital infrastructure and workforce upskilling to seize demographic advantages and reduce dependence on labor-intensive models.

Talent shortages will remain a persistent constraint, especially in sectors undergoing rapid digital transformation. Immigration policies, education systems and labor participation dynamics will all play a role in determining whether economies can harness or hinder this next phase of growth.