Exploring Post-Tariff Scenarios: The Future of the Global Economy

The global economy is navigating a complex landscape, with several significant factors shaping its trajectory. Among these are shifts in US trade policy, rising public debt levels, and the ongoing impact of climate change.

One of the most prominent changes is the US President Trump's import tariffs, which represent a major departure from the postwar international trade system and have far-reaching global repercussions. According to recent forecasts, these tariffs could reduce global GDP by 1.1 per cent by 2030, with the most impact felt in Mexico, the United States, and Canada. China and the Euro Area will also face negative impacts, albeit less severe.

The current US-EU trade deal, while bringing both positive and negative effects, has left some uncertainties. Consumers may still face a 15 per cent tariff on EU imports, potentially leading to higher prices and fewer varieties of goods. However, US producers stand to gain an advantage in the domestic market and face zero tariffs when exporting to the European Union.

The deal also involves around $600 billion of additional investment from the European Union into the US economy, but it does not specify whether this includes purchases of US financial assets like stocks and bonds or is strictly limited to foreign direct investment (FDI). Achieving the level of FDI required to reach the $600 billion investment figure would likely require more than doubling current levels, given that Europe (excluding the United Kingdom) direct investment in the United States was around $152 billion in 2024.

Meanwhile, the European Union's "ReArm Europe" plan aims to mobilise up to €800 billion in defence and military investment for member economies. This stimulus is projected to add about 0.5-0.6 percentage points to Germany's annual GDP growth from next year onwards and create small but positive spillover effects across the Euro Area. The EU countries most affected by the planned increases in defense spending are primarily those in Eastern Europe, some Nordic countries, and Germany.

The global economy is also facing a significant elevation in public debt levels due to proposed bills and increased defence spending. Public debt levels in advanced economies are at historical highs, raising concerns about fiscal sustainability and the space for further accommodative fiscal policy.

Climate change is another pressing issue, with economists warning of the detrimental impact of increasing climate-related events and the costs associated with the transition to clean energy and climate-resilient infrastructure. Technological advancements in Artificial Intelligence (AI) could potentially offer significant productivity gains and represent an upside risk to global economic growth.

The war between Russia and Ukraine continues with stalled peace talks and persistent spillovers for the global economy. Additionally, the volatile geopolitical environment, such as the US-brokered ceasefire between Israel and Iran in June 2025, remains a concern, with ongoing vulnerability that could reignite conflict and have potential implications on energy prices, shipping costs, and supply chains globally.

In conclusion, the global economy is facing significant challenges, and it is crucial for policymakers to navigate these issues with careful consideration to ensure sustainable and inclusive growth.