Global Economic Outlook 2025: Tariff Impacts, Stagflation Risks, and Cross-Border Economic Vulnerabilities

Executive Summary

The global economy faces mounting pressures from trade policy shifts, inflationary pressures, and sector-specific vulnerabilities across major economic regions. Current projections indicate a 60% probability of a US recession in 2025 (J.P. Morgan), EU stagnation at approximately 0.9% growth, and China’s growth stabilising at 4.5% (BBVA) amid aggressive stimulus efforts.

Tariffs are expected to significantly increase U.S. inflation rates in 2025, with most estimates projecting a rise of 2-3 percentage points above previous forecasts. Core inflation could approach or exceed 4% if aggressive tariffs persist, compared to a base case of 2.7%. These inflationary pressures will erode household purchasing power, slow economic growth, and complicate monetary policy.

Major companies across various sectors are already adjusting strategies to address weakening consumer demand. Walmart has implemented significant price-cutting measures, Chipotle has reported its first same-store sales decline since the pandemic, and multiple airlines have declared recessionary conditions, all pointing to troubling economic trends.

Disclaimer: This analysis is conducted by Perplexity AI and Claud AI. The sources (data) provided in the study come from the reports listed below, along with their corresponding references. 

Summary of Key Risk Factors by Region

Region	Risk Factor	Probability	GDP Impact	Risk Level
US	Full Trump tariff implementation (30% avg.)	60%	-2.0%	HIGH ⚠️⚠️⚠️
	Labour market contraction (Unemployment >4.7%)	45%	-1.2%	MEDIUM ⚠️⚠️
	Inflation resurgence (Core PCE >3.5%)	35%	+3.5% CPI	MEDIUM ⚠️⚠️
EU	US 10% auto tariffs	40%	-0.6%	MEDIUM ⚠️⚠️
	Energy price spike (TTF gas €50/MWh)	25%	-0.4%	LOW ⚠️
	Chinese import surge (15-20% market share)	30%	-0.3%	MEDIUM ⚠️⚠️
China	US 60% tariffs on key exports	70%	-1.2%	HIGH ⚠️⚠️⚠️
	Property market collapse (sales -25%)	50%	-2.0%	MEDIUM ⚠️⚠️
	Yuan depreciation (USD/CNY 7.5)	45%	+0.8% exports	MEDIUM ⚠️⚠️

Tariff Impacts on Inflation

Headline Findings

• Tariffs are expected to significantly increase U.S. inflation rates in 2025, with most estimates projecting a rise of 2-3 percentage points above previous forecasts, especially if current tariff policies remain in place.
• Core inflation could approach or exceed 4% if aggressive tariffs persist, compared to a base case of 2.7%.
• The price impact will be broad-based and most visible by summer 2025, as higher import costs are passed through to consumers via supply chains.

Mechanisms and Timing

• Tariffs function as a tax on imports, raising costs for U.S. businesses, which are then passed on to consumers through higher retail prices.
• The inflationary impact takes several months to propagate: producers are first hit, followed by wholesalers and retailers, with consumers seeing the full effect by May-June 2025.
• Food prices are among the first to rise due to perishable inventory, while durable goods (such as vehicles, electronics, and apparel) follow as older, lower-cost inventory is depleted.

Quantitative Projections

Scenario & Source	Projected Inflation Impact	Notes	Impact Level
All 2025 U.S. tariffs (Budget Lab, Yale)	+3.0% short-run CPI increase (pre-substitution), 1.6% long-run (post-substitution)	Equivalent to $4,900 annual household loss	HIGH ⚠️⚠️⚠️
April 2 tariff action (Budget Lab, Yale)	+1.3% short-run CPI increase	$2,100 annual household loss	MEDIUM ⚠️⚠️
Capital Economics	CPI to peak around 4% in 2025 (from 2.4% in March)	Double the Fed’s long-term target	HIGH ⚠️⚠️⚠️
RBC Economics	Core inflation 3.5-3.8% (vs. 2.7% baseline)	Aggressive tariffs could push higher	MEDIUM ⚠️⚠️
ECB Macro Models	U.S. inflation revised up by 0.2pp for 2025	Modest impact in baseline scenario	LOW ⚠️

Sector-Specific Effects

Sector	Short-run Impact	Long-run Impact	Severity
Clothing and textiles	Prices up 65-87%	Prices remain 25-29% higher	HIGH ⚠️⚠️⚠️
Shoes	87% higher	29% higher	HIGH ⚠️⚠️⚠️
Motor vehicles	12% price increase	15% price increase (~$7,400 per new car)	MEDIUM ⚠️⚠️
Food	2.6% higher	2.8% higher; fresh produce up 5.4% initially	MEDIUM ⚠️⚠️

Regional Economic Outlooks

United States: Tariff-Driven Stagflation

Growth Revisions

• S&P Global: 1.9% GDP growth in 2025 (down from 2.8% in 2024), with Q4/Q4 growth at 1.6%.
• IMF: 1.8% growth, a 0.9 percentage point downward revision, citing tariff impacts (0.4pp) and weakening momentum.

Recession Triggers

• Sahm Rule activated (3-month unemployment avg. rising 50+ bps).
• Inverted yield curve persists (10y-2y spread: -0.4%).
• Consumer confidence at 4-year lows, discretionary spending down 8% YoY.

Sector Stress

• Retail: February sales rose 0.2% MoM but missed forecasts (0.6%), with January revised to -1.2%. Walmart cuts 7,200 product prices, pressures Chinese suppliers for 10% cost reductions.
• Airlines: Southwest (-$149M net loss) and American (-$473M) underperformed; Delta (+$ 320 M) and United (+$ 478 M) were resilient. Southwest’s CEO stated: “I don’t care if you call it a recession or not, in this industry that’s a recession.”
• Restaurants: Industry sales projected at $1.5 trillion (+4%), but traffic fell 2.3% (Chipotle).

European Union: Divergent Trajectories

• Citi: 0.8% growth in 2025 due to -1pp tariff impact.
• EY: 1.3% growth from NextGenerationEU spending and consumption recovery.
• ECB Staff Projections: 0.9% GDP growth in 2025, revised down by 0.2pp due to trade uncertainty.
• Goldman Sachs: Germany (-0.3%) and France (-0.7%) may contract, while Spain grows at 2.0%.

Regional Disparities

Country	2025 Growth	Key Drivers	Outlook
Germany	0.5%	Export recovery, industrial stagnation	CAUTION ⚠️⚠️
Spain	2.8%	Tourism, EU funds	POSITIVE ✓
France	-0.7%	Fiscal constraints, energy costs	NEGATIVE ⚠️⚠️⚠️

China: Stimulus vs. Structural Weaknesses

• BBVA: 4.5% GDP (up from 4.1%) via RMB 5.5T stimulus.
• Goldman Sachs cut 2025 growth to 4.0%, anticipating 60bp rate cuts to offset tariff impacts.
• IMF downgraded China’s 2025 growth by 0.5pp to 4.0%, citing collapsing exports.

Structural Challenges

1. Property Sector Crisis: Housing prices fell 12% y/y in Q1 2025, reducing household wealth effects.
2. Deflationary Pressures: Headline CPI is projected at 0% in 2025, with PPI deflation persisting.
3. Trade Diversion: US tariffs could redirect $200B in Chinese exports to EU markets, depressing prices.

Cross-Border Impacts and Systemic Vulnerabilities

Cross-Border Impact Heat Map

Impact Area	US to EU	US to China	EU to US	EU to China	China to the US	China to the EU
Trade	⚠️⚠️⚠️	⚠️⚠️⚠️	⚠️⚠️	⚠️	⚠️⚠️⚠️	⚠️⚠️
Investment	⚠️⚠️	⚠️⚠️⚠️	⚠️⚠️	⚠️⚠️	⚠️⚠️	⚠️⚠️
Financial Markets	⚠️⚠️	⚠️⚠️	⚠️⚠️	⚠️	⚠️⚠️	⚠️
Inflation	⚠️⚠️	⚠️	⚠️⚠️	⚠️	⚠️⚠️⚠️	⚠️⚠️

US-EU-China Interdependencies

1. US Tariff Spillovers:
   • EU: A 10% US tariff on EU goods could reduce euro area exports by $45B, partially offset by a 5% EUR depreciation.
   • China: Export diversion to the EU may lower Chinese producer prices by 8-10%, exacerbating deflation.
2. Supply Chain Reconfigurations:
   • Reshoring: US firms face 12-15% cost hikes to relocate production from China, pressuring margins.
   • Friend-shoring: EU manufacturers report 20% cost savings by shifting to Southeast Asia, mitigating Chinese competition.
3. Financial Contagion:
   • Dollar Strength: The DXY index has risen 8% in 2025, increasing EM debt servicing costs and capital outflows.
   • Eurozone Bonds: German 10-year yields have fallen 50bp on safe-haven demand, compressing bank profitability.

Trade Diversion Effects

• China to EU: $200B exports redirected, depressing EU producer prices 8-10%.
• US Reshoring: 12-15% cost hikes for manufacturers leaving China.

Global Trade & Policy Dynamics

Tariff Escalation Timeline

Date	Measure	Impact	Severity
Mar 12	25% US steel/aluminium tariffs	EU exports -$45B	HIGH ⚠️⚠️⚠️
Apr 2	34% China tariff + 125% reciprocal rate	China exports -$200B	HIGH ⚠️⚠️⚠️
Apr 9	EU suspends retaliation for 90 days	Averts €21B trade war	POSITIVE ✓

Broader Economic and Policy Implications

• Reduced purchasing power: Average household loses $4,900/year in 2024 dollars from all tariffs; lower-income households are hit hardest.
• Stagflation risk: Higher inflation with slower growth; real GDP growth is projected to be 0.9-1.1 percentage points lower in 2025 due to tariffs.
• Federal Reserve response: Tariff-driven inflation complicates monetary policy, making it harder for the Fed to cut rates even as growth slows.
• Consumer behaviour: Some frontloading of purchases is expected, but sustained price increases will likely slow overall consumer spending.

Policy Recommendations

Region	Immediate Actions	Long-Term Measures	Priority
US	• Suspend non-strategic tariffs • Fed rate cuts by Q3 2025	• Modernise infrastructure • Streamline permitting	HIGH ⚠️⚠️⚠️
EU	• Accelerate capital markets union • Subsidise energy storage	• Diversify import partners (ASEAN, India) • Complete single market	MEDIUM ⚠️⚠️
China	• Direct stimulus to households • State-led property acquisitions	• Liberalise SOES • Boost domestic consumption	HIGH ⚠️⚠️⚠️

Conclusion

The global economy remains precariously balanced, with US stagflation, EU fragmentation, and China’s property crisis creating synchronised risks. Updated data confirms that tariff impacts are more severe than initially projected, with China’s 145% cumulative rate and the EU’s tactical retaliation reshaping trade flows.

The interplay of trade policy missteps and monetary rigidity threatens to tip the global economy into synchronous stagnation. Major companies across various sectors are already adjusting strategies to address weakening consumer demand, as evidenced by Walmart’s price-cutting measures, Chipotle’s same-store sales decline, and multiple airlines declaring recessionary conditions.

With the Sahm rule triggered, consumer confidence at multi-year lows, and major companies across sectors experiencing demand challenges, recession concerns appear increasingly justified. Coordinated policy adjustments and multilateral dialogue remain imperative to mitigate systemic risks.

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