Global Economic Outlook: Impact of U.S. tariffs and geopolitical tensions

As U.S. tariffs details emerged, replacing the uncertainty and speculation that had been building since President Donald Trump’s inauguration, we hoped to publish our second-quarter projections amid a backdrop of clarity. The U.S. and China settled on a trade framework, and deals were inked with the United Kingdom and Vietnam.

Economic and geopolitical uncertainty

However, as the various 90-day tariff pauses lapsed, new tariffs announced by President Trump highlighted ongoing global trade volatility and the continued uncertainty characterizing the economic outlook.

The European Union (EU) is racing to clinch a deal, signalling a willingness to accept a 10% universal tariff with exemptions, while facing threats of up to 50% tariffs. Beijing, meanwhile, warned against reopening trade tensions, threatening retaliation on any country that excludes China from supply chains, in a bid to curry favour with the U.S.

In Canada, Prime Minister Mark Carney scrapped the digital services tax affecting large U.S. tech companies after a brief termination of bilateral negotiations by President Trump. Optimism for an agreement remains, though certain tariffs, including steel and aluminum, are still in place.

Geopolitical frictions continue with Russia’s full-scale invasion of Ukraine now in its third year, Middle East conflicts, tensions across the Taiwan Strait and the recent escalation between the U.S. and Iran. In the context of all this trade uncertainty, EDC Economics forecasts global growth of 2.6% in 2025 and 3% in 2026, the slowest pace recorded in consecutive years since 2001-2002.

U.S. economic performance and Federal Reserve actions

U.S. imports surged early in the year, as companies rushed to frontload orders ahead of any new tariffs, causing economic contraction. Despite weak business and consumer confidence, and labour market softness, hiring continues. Higher tariffs haven’t yet impacted consumer prices, with companies absorbing lower profit margins. We forecast U.S. growth of 1.4% in 2025 and 1.7% in 2026, with no recession expected.

The U.S. Federal Reserve cut its economic outlook but raised inflation expectations due to tariff concerns. Prospects of a relatively modest increase in unemployment and above-target inflation give the Fed room to monitor developments before acting. We expect the Federal Open Market Committee to reduce interest rates by only 25 basis points in 2025, followed by three quarter-point cuts in 2026.

Canadian economic outlook

While a tariff-related surge in imports initially slowed the U.S. economy to start the year, the corresponding increase in Canadian exports provided temporary support for Canada’s economy. However, as U.S. stockpiling diminishes, particularly with impending tariff changes, Canada’s economy faces a challenging year ahead.

An increasingly volatile outlook complicates business planning for Canadian companies, export-dependent or not, dampening investment and hiring prospects. This has resulted in a dramatic slowdown in employment growth, pushing Canada’s unemployment rate to 7% in May—the highest non-pandemic rate since 2016. Economic growth is expected to fall to 0.8% in 2025 and 1.1% in 2026.  

After cutting rates in March, the Bank of Canada kept its policy rate unchanged, looking past early tariff impacts. We expect that as the Canadian economy weakens and trade challenges persist, the bank is likely to cut rates a total of three times in 2025, with no moves in 2026.

Currency dynamics and global trade uncertainty

Our outlook for the Canadian dollar has changed since our spring Global Economic Outlook (GEO). Previously, we anticipated that U.S. tariffs and rising global trade uncertainty would lead to an appreciation of the U.S. dollar relative to most other global currencies, including the Canadian dollar. The phenomenon known as the “flight to quality,” where investors rush to hold U.S. dollar-denominated assets as a safe haven, has characterized market reaction to global uncertainty over the last century.

However, concerns around policy stability in the U.S. have instead led to the appreciation of the loonie (and other currencies). With the Canadian dollar gaining roughly four cents against the U.S. dollar since the start of 2025, we now forecast it will average US$0.69 in 2025 and US$0.70 cents in 2026.

The first half of the year presented an unpredictable trade environment for Chinese exporters and policy-makers. Tariff rates on Chinese exports to the U.S. surged from roughly 20% to 145%. While this has impacted trade with the U.S., China continues to expand trade with the rest of the world. For policy-makers, exports remain critical to the overall economic outlook, as China’s domestic economy struggles with weak demand. The government continues to support key sectors and provide targeted stimulus to promote growth. Overall, we forecast China to grow by 4.6% in 2025 and 4.1% in 2026. 

Euro Area growth has long underperformed relative to the U.S. But we expect an uptick in growth for the 20-member currency union from the last couple of years. While economic activity in France remains constrained by political paralysis, hindering necessary reforms, Germany is poised for steady growth with an unprecedented fiscal package bolstering defence and infrastructure spending. Euro Area growth is forecasted at 1% in 2025 and 1.3% in 2026.

The bottom line: Navigating uncertainty in global trade

While the global economy benefited from a brief reprieve following the U.S. tariff announcements, the trade environment remains highly uncertain. Together with the flaring of geopolitical tensions worldwide, this creates a challenging backdrop for business planning.

What’s clear is that growth is slowing and the cost of doing business is rising. Now, more than ever, companies must stay informed and prepare for a multitude of scenarios. This isn’t the time to retrench, but rather invest in the resilience of your operations.

This week, a very special thanks to Ross Prusakowski, director of our Country & Sector Intelligence team.

As always, at EDC Economics, we value your feedback. If you have ideas for topics that you’d like us to explore, please email us at economics@edc.ca and we’ll do our best to cover them.