Can the global economy continue growing?

The global economy faces a period of significant uncertainty. Most notably, the international trade environment could undergo a massive transformation that may leave no country’s economy untouched.

Much of the concern is prompted by President Donald Trump’s stated desire to apply stricter tariffs on imported goods and the potential for escalated worldwide trade wars. The Trump administration’s focus on tariff-centered trade policies is in sharp contrast to much freer global trade policies in place since the 1990s. In response to sharply higher tariffs on Chinese imports into the U.S., China now applies significant new tariffs on U.S. goods. The U.S. has also imposed across-the-board 10% tariffs on virtually all imports regardless of their originating country. Some higher tariffs apply to other specific import categories.

This change puts the global economy in a transitional phase. The outcome is difficult to predict, but there are increasing fears of negative economic ramifications for the U.S. and across the globe. Could a global recession result? 

“The risks of a global recession in 2025 have increased, and while in our estimation, they remain below 50%, that in itself is reason for concern,” says Beth Ann Bovino, chief economist at U.S. Bank. “The risk stems from the fact that tariffs raise costs for consumers and businesses.” Higher prices could force central banks to raise interest rates to help fight inflation, resulting in higher borrowing costs. These trends could potentially dampen economic activity.

Is there slower global economic growth ahead?

In its economic projections released in April 2025, the International Monetary Fund (IMF) projected slower 2025 global growth than initially anticipated. According to the IMF, “The swift escalation of trade tensions and extremely high levels of policy uncertainty are expected to have a significant impact on global economic activity.¹

The IMF says between 2000 and 2019, global economic growth, as measured by Gross Domestic Product (GDP), averaged 3.7%. Since the onset of the COVID-19 pandemic in 2020, GDP has been less stable. The IMF initially predicted a global growth rate of 3.3% in 2025 and 2026. Now it has adjusted that rate lower, to 2.8% in 2025 and 3.0% in 2026.¹

¹ Source: International Monetary Fund, “World Economic Outlook, April 2025: A Critical Juncture Amid Policy Shifts.”

IMF projects advanced economies growing at only 1.4% in 2025, while emerging markets are projected to grow by 3.7%.

A bigger risk – stagflation

A recession, representing a decline in economic growth as measured by Gross Domestic Product (GDP), remains a risk. Bovino and other economic analysts speculate that stagflation could be a more challenging result. It results from the simultaneous rise in inflation and unemployment rates, which is considered unusual. “We experienced significant stagflation in the late 1970s and early 1980s,” says Bovino. “The numbers at that time were far more challenging than what exists today.”

Between 1979 and 1981, the annual inflation rate, as measured by the Consumer Price Index (CPI), topped 10%. In November 1982, the nation’s unemployment rate peaked at 10.8%.² “At that time, it forced the Federal Reserve to raise interest rates dramatically, sending the U.S. into a deep recession,” notes Bovino. It’s a scenario most analysts feel could be painful and should be avoided.  

Stagflation is a significant monetary policy challenge for the Federal Reserve (Fed). While the Fed’s dual mandate is to maintain moderate inflation and full employment, its policy tools are in tension during an environment where both inflation and unemployment are high. To curb surging inflation, the Fed typically raises the federal funds target rate, which guides overnight lending between large financial institutions. This was the core of Fed monetary policy in 2022 and 2023 as inflation surged to more than 9%. When a weaker economy results in higher unemployment, the Fed typically lowers the fed funds rate, similar to what it did in early 2020 as the COVID pandemic began. “When both inflation and unemployment rise, the Fed faces a dilemma in how to respond effectively,” says Bovino. “The Fed’s toolkit to lower inflation also weakens the jobs market, and vice-versa. This is one of the challenges of a stagflation environment.”

Trade tensions are the key variable

The changing international trade environment is likely to have the most significant impact on economic expectations. “There’s heightened uncertainty from the trade policies implemented by the Trump administration as well as those they’ve pulled back on,” says Bovino. “It’s hard to predict what exactly lies in the future.”

After his April 2, 2025 announcement of severe new tariffs affecting most major trading partners, President Trump “paused” or reduced most of those tariffs. The notable exception was China, where, in a series of steps, Trump raised tariffs on most Chinese goods to 145%. China countered, applying 125% tariffs on U.S. goods.

“The pause gives the U.S. and the rest of the world more time to negotiate,” says Bovino. “That could result in lower tariffs and perhaps ease some economic concerns.” According to Bovino, the biggest concern is the severity of the U.S.-China trade war. “With those being the two largest economies in the world, there is fallout in the form of collateral damage to other countries’ economies.”

Source: International Monetary Fund, GDP, Current Prices, April 2025.

The U.S. consumer’s critical role in the global economy

A key question stemming from the rise of new tariffs is how global economies may be affected by reduced trade with the U.S. President Trump has indicated that one key tariff objective is to “reshore” manufacturing, resulting in more goods being produced in the U.S. rather than imported from overseas. While it’s unclear how achievable this objective may be, any reduction in foreign trade could have a significant global economic impact.

“The reliance on U.S. consumption and investment has been ongoing, largely because we’re the largest economy in the world and we tend to spend a lot,” says Bovino. U.S. household savings rates tend to lag those of the rest of the world.” This level of U.S. spending by businesses and consumers is an essential ingredient in global economic growth that isn’t easily replaced. “If the world doesn’t want to be dependent on the U.S., the question is, how will it replace that cash flow?” says Bovino. “It’s hard to imagine another country could step up to the plate and replace the U.S. role.”

China is the greatest threat to overtake the U.S. role as the world’s largest economy. Still, China has been unable to meet its objective of increased domestic consumer spending. In addition, while China’s GDP is second only in size to the U.S., its per capita GDP ranks far lower, reflecting much lower living standards than the U.S. and other westernized nations.³

Source: International Monetary Fund, GDP Per Capita, current prices, in U.S. Dollars, 2025.

The U.S.-China trade war threatens the status quo of broader trading relationships. Each country has indicated a desire to isolate the other in global trade. “While China may hope to take more of a leadership role in the world economy, many countries are likely to approach their working relationship with China cautiously,” says Bovino.

Factors to watch going forward

Immediate economic concerns center on continued trade tensions and whether they can be resolved without a significant economic impact. “At the household level, the challenge created by tariffs is that they work as a tax on purchases,” says Bovino. “If the price of that cheap product you bought that was produced in China suddenly doubles, that creates a squeeze on household income.” This could also pressure U.S. corporations’ profit margins, particularly if trading partners put retaliatory tariffs in place. While President Trump’s 90-day tariff “pause,” implemented on April 9, 2025, alleviated some concerns, tariff levels remain much higher than in recent times. The economic fallout remains unclear.

Bovino says a hopeful sign is that employment levels in the U.S. and many developed countries, for now, remain strong. “That provides a cushion for the economy,” says Bovino. “While lower-income households may face more of a squeeze in the current environment, middle and higher-income households are still in relatively solid shape.”

Businesses have expressed more caution given uncertainties over trade policy directions, but most are working from a position of strength. “We’ll be watching the potential impact of artificial intelligence (AI), which could positively impact productivity for the U.S. and global economy,” says Bovino.

The direction of the U.S. economy will likely continue to be an influential factor in the global economy’s fortunes. “If U.S. economic activity slows, the impact may reverberate worldwide and the global economy could face challenging times,” says Bovino.