Global economy

At the end of 2024, global economic growth was solid, and inflation had eased further toward central banks’ targets. Since then, the United States has imposed large and broad-based tariffs on most of its trading partners.

Tariffs and uncertainty have significantly weakened and clouded the outlook for the global economy. If the tariffs announced on April 2 are fully implemented, the weighted average US tariff rate will increase from about 2% to about 22%. This would be its highest level in more than a century.

US tariffs are negatively impacting the prospects for global economic growth, although the size and duration of the slowdown is highly uncertain. This Report presents two scenarios with distinct assumptions about US trade policy instead of a single base-case projection (see the Assumptions for the outlook scenarios section).

Scenario 1: Most tariffs imposed since the trade conflict began are negotiated away, but the process is unpredictable. Uncertainty about trade policy continues until the end of 2026. Global growth dips below 3% in 2025 (Chart 17 and Table 4), and inflation eases closer to central banks’ targets.

Scenario 2: The uncertainty and limited tariffs in Scenario 1 persist and other US tariffs are added. A long-lasting global trade war unfolds. Global output is more than 1% lower in 2026 than it is in Scenario 1, largely reflecting weaker economic growth in North America. Tariffs drive up global inflation, mostly in the United States, starting in the second quarter of 2025.

United States

The US economy grew strongly in 2024 but then slowed in early 2025 amid rising policy uncertainty and weakening sentiment. Inflation remains slightly above target, and inflation expectations have risen.

Consumption growth appears to have eased to below 1% in the first quarter of 2025 due to winter storms, a pullback from robust holiday-related spending and declining consumer confidence. The US administration’s trade policies have led to volatility in financial markets and fears of an economic slowdown. Nevertheless, income growth remains solid and continues to support consumer spending.

Despite this elevated uncertainty, business investment likely picked up in the first quarter due to a rebound in aircraft acquisitions and higher spending related to artificial intelligence (AI).

US imports are estimated to have risen sharply in the first quarter because many businesses pulled forward purchases from abroad and built up their inventories to avoid paying anticipated tariffs.

Inflation appears to have remained close to 2½% in the first quarter. Inflation in prices for food, insurance and motor vehicles is estimated to have picked up, while inflation in shelter prices has continued to moderate. Businesses’ and households’ expectations for future inflation have risen in response to tariffs.

Scenario 1

Growth in US gross domestic product (GDP) weakens from 2.8% in 2024 to about 2% in 2025 and 2026 (Chart 18 and Table 4). Demand is held back by uncertainty about trade policy, weak sentiment and tight financial conditions. Inflation returns to the Federal Reserve’s 2% target in 2027.

The slowdown in US growth is uneven:

• Consumption growth moderates in the second half of 2025 and remains somewhat subdued throughout 2026, reflecting increased household cautiousness.
• Business investment grows strongly because AI-related spending outweighs the adverse impacts of trade policy uncertainty.
• Export growth and import growth are both weaker than global demand growth, partially reflecting the tariffs imposed in this scenario.

US inflation continues to moderate toward the Federal Reserve’s 2% target (Chart 19). This gradual decline reflects:

• the lower demand due to trade policy uncertainty and weak sentiment
• the decline in oil prices in early 2025

The factors pushing down inflation are partially offset by upward pressure from an increase in:

• the prices of goods because of tariffs on imports from China as well as on steel and aluminum
• inflation expectations, which affect wage and price-setting behaviour

Scenario 2

The US economy goes into recession. High tariffs imposed by the United States and countermeasures by US trading partners weaken demand and lower potential output (see Table 4 and the Appendix: Potential output and the nominal neutral rate of interest). Tariffs also push US inflation up.

The US economy experiences a four-quarter recession. GDP contracts starting in mid-2025 before regaining momentum in the second half of 2026 (Chart 18). Weaker consumption holds back GDP growth, which is on average 1.3 percentage points lower over 2025 and 2026 than it is in Scenario 1.

• Consumption declines through to mid-2026 due to weak growth in real disposable income. A fall in employment and soft labour productivity growth also contribute to this decline. The transfer of some tariff revenues to households partially offsets the impact of tariffs on consumption.
• US tariffs increase the price of imported machinery and equipment and lower consumer demand. Business investment slows over the second half of 2025.
• Tariffs cause exports and imports to contract sharply starting in mid-2025. They continue to fall until mid-2027.

Tariffs push total inflation to 3% in mid-2026. Lower oil prices and excess supply in the economy partially offset the upward pressure on inflation.

Overall, inflation is higher than in Scenario 1 by about 0.5 percentage points in 2026. Inflation then eases toward the Federal Reserve’s 2% target in 2027.

Euro area

Recent data suggest that the euro area economy expanded at a modest pace of 0.5% in the first quarter of 2025, after having grown by around 1% in 2024. Manufacturing appears to have remained weak. Cold weather pushed up natural gas prices in early 2025, and this boosted consumer price index inflation to 2.3% in the first quarter.

Scenario 1

Trade policy uncertainty adds to the ongoing risks associated with the Russian invasion of Ukraine. Proposals to expand fiscal spending—including Germany’s boost to infrastructure and defence spending—offset the negative impact from trade policy uncertainty. Overall, euro area growth is 0.8% in 2025 before it rises to close to 1.5% over 2026 and 2027 (Table 4).

Inflation in the euro area slows to the European Central Bank’s 2% target by early 2026 as the impact of the recent increase in natural gas prices fades.

Scenario 2

Growth in the euro area slows to 0.5% in 2025. US tariffs reduce demand for euro area exports and add to the competitiveness issues faced by the region’s manufacturing sector. Additionally, counter-tariffs imposed by the European Union drive up the prices of imports. These price increases reduce real income and increase the cost of investment, leading to slower growth in domestic demand. Growth gradually picks up to 0.8% in 2026 and strengthens further in 2027 as the economy adjusts to the new tariff regime (Table 4).

Inflation in the euro area is roughly unchanged from that in Scenario 1. The upward pressure on inflation from tariffs is offset by lower global oil prices and weaker domestic demand.

China

Recent data show that China’s growth is slowing modestly. The property sector continues to struggle. Export growth was strong in late 2024, partly because of increased demand from US importers in anticipation of new tariffs. However, it weakened in February when the US imposed a further 10% tariff on imports from China.

China has subsequently become embroiled in an escalating trade conflict with the United States. At the time of this Report, US tariffs on imports from China and China’s tariffs on US goods are set at well over 100%.

The Chinese government has indicated that it will provide fiscal support to businesses and households adversely affected by the trade conflict.

Scenario 1

Economic growth in China slows slightly to 4.8% in 2025 (Table 4). The property downturn and the associated weakness in consumer confidence continue to put downward pressure on domestic demand. Tariffs weigh on exports.1 In the long term, population aging continues to slow growth.

Scenario 2

The increase in tariffs weighs on exports.2 Policy support mitigates the negative impact from the tariffs. Growth slows to 4.6% in 2025—0.2 percentage points lower than in Scenario 1—and averages around 4¼% over 2026 and 2027 (Table 4).

Commodities

Oil prices have dropped since the January Report. Other commodity prices have been volatile.

Energy prices have declined

Brent oil prices have fallen to around US$65—US$15 below the assumption in the January Report (Chart 20). The decline reflects two main factors:

• concerns that the global trade conflict will reduce future oil demand
• plans by members of the Organization of the Petroleum Exporting Countries (OPEC) and some non-OPEC producers to increase production

The spread in prices between West Texas Intermediate and Western Canadian Select has narrowed from US$15 assumed in the January Report to about US$10. This is because:

• traders now believe that US tariffs will not be broadly applied to Canadian oil
• Venezuelan oil exports are facing a pending decline
• seasonal oil sands maintenance is restraining Canadian production

Natural gas prices have risen since the January Report due to colder-than-normal weather conditions.

Non-energy commodity prices are unchanged

The Bank of Canada’s non-energy commodity price index remains roughly unchanged since the January Report. US tariff threats have led US metals traders to pull forward demand. This has caused the prices for some metals that are traded on US exchanges, such as copper, to increase. Gold prices have risen sharply as investors seek to protect themselves against geopolitical uncertainty and the trade conflict. In contrast, agricultural prices have fallen, partly due to tariffs on Canadian exports.

Assumptions about commodity prices

The price of Brent crude oil is US$70 in Scenario 1 and US$60 in Scenario 2. High and broad-based tariffs lead to less global demand and lower oil prices.

In response to weaker expectations for growth, markets are also pricing in additional policy easing. This has led to a decline in short-term government bond yields, both in Canada and globally. Longer-term yields have declined by a lesser extent or risen. Greater uncertainty has led investors to demand a higher term premium to hold longer-term government bonds.

The many shifts in US trade policy have led to a sharp rise in volatility in global equity, foreign exchange and government bond markets. This volatility has also increased the risk of disorderly market dynamics. For example, since April 2, there have been periods of low market liquidity in longer-term government bonds as leveraged participants have liquidated concentrated positions. Despite the decline in liquidity, there has been no sign of disfunction in major financial markets.

The value of the US dollar has fallen against many currencies because of the relatively large downgrade to the US growth outlook. This has supported the Canadian dollar, which has recently risen to about 72 cents US. The Canadian dollar has remained stable against a broad basket of other currencies.

Endnotes