Can the global economy continue growing?

Recession risks remain in the United States, although the domestic economy appears to face fewer headwinds than other parts of the global economy. Trade tensions could be the key factor influencing the near-term economic outlook for many countries. Since much of the tariff activity originates in the U.S., various targeted nations might experience economic consequences.

“It appears the U.S. economy is slowing down compared to its growth rate in recent years,” says Beth Ann Bovino, chief economist for U.S. Bank. “Nevertheless, it is likely the U.S. economy is in more solid shape relative to most of the rest of the world."

Economic uncertainty partly stems from 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 stands in sharp contrast to much freer global trade policies in place since the 1990s. The Trump administration eased initial tariffs, including those of up to 145% on Chinese-produced goods. It imposed across-the-board 10% tariffs on most trading partners and even higher duties on specific goods. Bovino noted “But even with those consolations, the U.S. effective tariff rate could still be over 6-times its 2024 year-end rate of 2.5%, a significant tax that someone has to pay.”

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.” First, from higher prices, which reduce purchasing power. If prices rise, it might force central banks to raise interest rates to help fight inflation, resulting in higher borrowing costs. These trends could potentially dampen economic activity.

Bovino currently places the potential of a U.S. recession in the coming months at 35%, slightly lower than previous projections. “Still, that’s a risk that’s about three times higher than in normal times,” says Bovino.

Is 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%.

Inflation or 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 for the U.S. at least, stagflation could be a more challenging result. Stagflation, the simultaneous rise in inflation and unemployment rates, is an unusual occurrence. “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.”

Bovino says stagflation is may be a greater risk for overseas economies. “They are more exposed to inflationary ramifications from tariffs.” She attributes this to the level of economic activity driven by trade. “For the rest of the world, 60% of economic activity is trade driven,” says Bovino. “Only about 25% of U.S. Gross Domestic Product (GDP) is trade driven.”

Trade tensions are the key variable

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. Since then, the two countries relented, at least for a time, with the U.S. reducing tariffs on Chinese goods to 30% and China imposing tariffs of just 10% on U.S. imports. July 9th ends the 90-day pause, while Bovino expects the pause to continue, if elevated retaliatory tariffs resume, the effective tariff rate would reach levels not seen since the year 1900, with recession risk climbing higher.

As tariff negotiations continue, Bovino says 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.”

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

If the U.S. adopts new, stricter tariff policies, it might cause a decline in foreign trade, which 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. While China’s GDP is second only in size to the U.S., its per capita GDP ranks far lower, reflecting poorer living standards than the U.S. and other Westernized nations. ³

In addition to the risk of a slowdown in export activity, China’s economy faces other challenges. “It is still struggling with an overbuilt real estate market, with home prices down dramatically over the last few years, eating into household wealth” says Bovino. “Chinese consumer sentiment has weakened as well, so households are more cautious about spending. As a result, the country’s economic growth rate is challenged.”

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. Even with the Trump administration’s tariff “pauses,” tariff levels remain much higher than in recent times. The economic fallout remains unclear.

Geopolitical tensions have become a much bigger economic concern, particularly on households and businesses (ex-energy), given the impact on energy prices. The Israel-Iran 12-day war pushed oil prices (WTI) up by over $10 on the news. Bovino says “An extra energy cost, in addition to the tariff tax, is another challenge that households and businesses may face if the ceasefire fails.”

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. “Europe may face some unemployment risk given the impact of tariffs and some economic weakness, but the fluid U.S. labor market could mean any upward moves in the unemployment rate happen first in the U.S.”

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.