Fitch Ratings has sharply lowered its forecasts for world growth in response to the severe escalation in the global trade war. In a special update to its quarterly Global Economic Outlook, Fitch has cut world growth in 2025 by 0.4pp and China and US growth by 0.5pp from the March edition.
US annual growth in 2025 is expected to remain positive at 1.2% but will slow to a crawl through the year to just 0.4% yoy in 4Q25. China’s growth is forecast to fall below 4% this year and next while eurozone growth will remain stuck well below 1%. World growth is projected to fall below 2% this year, which would be the weakest since 2009 excluding the pandemic.
US ‘Liberation Day’ tariff hikes were far worse than expected. While subsequently paused and replaced with a near-universal 10% rate for 90 days, the shock prompted several rounds of retaliatory moves between China and the US, taking bilateral tariff rates over 100%. The US average effective tariff rate (ETR) has risen to 23%, the highest since 1909 and well above the 18% we assumed in March. It is hard to predict US trade policy with any confidence, but we now assume the US ETR on China remains above 100% for some time, before falling back to 60% next year. At this stage we are sticking with our assumption of a 15% US ETR on other trade partners, in line with the assumption in the March GEO.
Tariff escalation will hit US-China trade flows dramatically. With limited scope for import substitution or trade diversion in the near term, the adverse supply shock in the US could be marked. Our US inflation forecast has been revised up to over 4%, implying a stagnation in real wages. Massive policy uncertainty is hurting business investment prospects, equity price falls are reducing household wealth and US exporters will be hit by retaliation.
China’s economy has grown faster than expected over the past year, but net trade has accounted for a third of GDP growth. This will slow sharply as exporters struggle to redirect sales in the near term. China’s housebuilding slump and deflationary pressures are continuing, but we expect fiscal and monetary policy easing to be stepped up. We also expect some additional US tariff revenues to be recycled back into the US economy over the next 18 months, including through tax cuts. But as the world’s two largest economies slow, spillovers will be felt far and wide, and this is reflected in our broad-based downward forecast revisions.
Fitch still expects the Federal Reserve to wait until 4Q25 before cutting rates despite the deteriorating US growth outlook. Import prices are set to rise sharply and there has been an alarming jump in US households’ medium-term inflation expectations over the past two months. However, the surprising weakening of the US dollar has created more space for other central banks to ease and we now expect deeper rate cuts from the ECB and in emerging markets. Lower commodity prices – we have lowered our 2025 Brent oil price assumption by USD5 to USD65 – will also facilitate a faster pace of monetary easing outside the US as growth slows.