The global economy remained resilient in 2024, expanding at an annualized rate of 3.3 percent in the second half of the year, according to the OECD. Growth was driven by real income gains and easing interest rates, though subdued consumer confidence, weaker government spending, and fluctuating external demand posed challenges. Looking ahead, global GDP growth is expected to moderate to 3.1 percent in 2025 and 3.0 percent in 2026, reflecting the impact of recently announced tariff increases between China and the United States, as well as broader trade restrictions on U.S. imports of steel and aluminum. The U.S. is also set to impose a 25-percentage-point tariff hike on all imports from Canada and Mexico, excluding potash and energy products, prompting expected retaliatory measures. These forecasts do not incorporate additional trade escalations beyond these measures.
Trade policy uncertainty has intensified in recent months, with a growing number of economies implementing new barriers. This has led to increased economic policy uncertainty, particularly in Canada and Mexico, which are heavily exposed to U.S. trade measures. Washington has already raised tariff rates on Chinese imports by 20 percentage points, prompting Beijing’s retaliation. Additional tariffs on steel and aluminum imports from all trading partners have triggered further countermeasures. A 25-percentage-point hike on Canadian and Mexican imports is set to take full effect in April, with a reduced 10-percentage-point increase on Canadian energy products and potash. Canada has already imposed duties on selected U.S. imports, while Mexico has signaled its intent to respond. Given their high trade exposure to the U.S., both economies are expected to bear the brunt of these restrictions.
As trade barriers tighten and geopolitical risks persist, economic activity is projected to weaken from early 2025. Higher trade costs are expected to filter through to consumer prices, adding inflationary pressure and likely prompting central banks to maintain restrictive policies for longer than previously anticipated.
In North America, economic growth is forecast to slow as these tariffs take effect. U.S. GDP is projected to decelerate from 2.8 percent in 2024 to 2.2 percent in 2025 and 1.6 percent in 2026. Canada’s growth is expected to fall from 1.5 percent in 2024 to 0.7 percent in both 2025 and 2026, while Mexico is forecast to enter a recession, contracting by 1.3 percent in 2025 and 0.6 percent in 2026. However, a more accommodative trade policy—wherein exemptions for USMCA-compliant imports are extended—could provide some relief. Under this scenario, Canadian GDP growth would improve to 1.3 percent in both 2025 and 2026, while Mexico’s contraction would be less severe at 0.1 percent in 2025, followed by a modest 0.8 percent rebound in 2026. The U.S. would see slightly stronger growth, reaching 1.7 percent in 2026.
In Europe, the direct effects of these tariffs are expected to be limited, though broader geopolitical uncertainty remains a drag on economic activity. The euro area is projected to grow from 0.7 percent in 2024 to 1.0 percent in 2025 and 1.2 percent in 2026, while the U.K. is expected to expand by 1.4 percent in 2025 and 1.2 percent in 2026. Growth in South Korea and Australia remains stable but weaker than previously anticipated. Japan, benefiting from strong corporate profitability and wage growth, is forecast to see GDP rise from 0.1 percent in 2024 to 1.1 percent in 2025 before moderating to 0.2 percent in 2026.
Among emerging markets, G20 economies are generally expected to decelerate. China’s GDP is forecast to expand by 4.8 percent in 2025, as government stimulus offsets the impact of trade restrictions, before moderating to 4.4 percent in 2026. India and Indonesia are projected to fare better, supported by trade diversification efforts. India’s GDP growth is forecast at 6.4 percent in FY 2024-25 and 6.6 percent in FY 2025-26, while Indonesia is expected to grow by 4.9 percent in 2025 and 5.0 percent in 2026. Brazil’s economy, however, is set to slow from 3.4 percent in 2024 to 2.1 percent in 2025 and 1.4 percent in 2026, as the effects of earlier monetary tightening and U.S. trade restrictions on steel and aluminum weigh on growth.
Inflation forecasts have been revised higher due to expected price pressures from tariff hikes. Headline inflation across the G20 is expected to decline from 5.3 percent in 2024 to 3.8 percent in 2025 and 3.2 percent in 2026, while core inflation in advanced economies is projected to moderate to 2.7 percent in 2024, 2.6 percent in 2025, and 2.4 percent in 2026. Inflation is expected to remain above central bank targets in major economies, including the U.S. In emerging markets, inflation is likely to ease significantly in Argentina and Türkiye, though persistent pressures remain in South Africa, Indonesia, and China. In Mexico, tariff-induced inflation is expected to dissipate by 2026 as economic activity slows. A more moderate trade policy could reduce inflationary pressures in North America, potentially allowing for slightly looser monetary policies in the U.S., Canada, and Mexico.
Global trade rebounded in 2024 but softened toward year-end. Merchandise imports into the U.S. surged in January, reflecting trade front-loading amid uncertainty over tariff implementation. Trade flows, particularly between Asia and North America, have been shaped by supply chain concerns, longer transit times, and tariff risks, leading to shifts in purchasing patterns. OECD high-frequency indicators suggest a weakening in global economic activity in early 2025, with business surveys pointing to slowdowns in previously resilient economies such as the U.S. and Brazil. While manufacturing output shows signs of stabilization in the euro area and the U.S., service-sector activity remains subdued, and consumer confidence continues to falter despite real income growth in some economies.
At this juncture of heightened uncertainty, where geopolitical developments appear to exert a greater influence than economic fundamentals, the Baltic Dry Index has recovered from its first-quarter lows. These earlier troughs were largely a result of a double blow – rising uncertainty and unfavorable seasonal patterns. With the latter no longer in play, the spot market has gained momentum, particularly in the geared segments, reflecting a more supportive trade environment.
Data source: Doric