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2025 has been the year of uncertainty. Following the inauguration of President Trump in late January, the global economy has been buffeted by a series of shocks. From a sharp spike in tariffs following Liberation Day in April, to ongoing geopolitical uncertainty and conflicts in the Middle East and Ukraine, to attacks on central bank independence, 2025 has had it all.
The past two weeks feels like a microcosm of the year. There has been the positive, particularly the announcement of a ceasefire deal between Israel and Hamas. There has been the negative, with the US government shutting down on October 1. And there has been the general escalation in political uncertainty around the world after French Prime Minister Sebastien Lecornu resigned just weeks into the job and Sanae Takaichi became leader of Japan’s ruling conservative party and shortly the country’s first female Prime Minister.
Given the ongoing uncertainty, how do we expect the global economy to fare over the remainder of 2025 and 2026? The US has been at the epicentre of much of the 2025 uncertainty and will remain key to shaping the global outlook.
The current US federal government shutdowns will clearly have a negative impact on near-term economic growth. However, the experience of prior shutdowns, including those in 2018-19 and 2013 suggests that they will tend to have a small and temporary impact on economic activity, with growth rebounding once the government re-opens. For instance, the CBO estimates that the 35-day shutdown over December 2018 and January 2019, subtracted around 0.2ppts from US quarterly annualised growth in Q4 2018 and 0.4ppts in Q1 2019, before boosting growth by 1ppt in Q2 2019. All up, the CBO estimates the shutdown wiped off just 0.02% from 2019 annual GDP.
Since the current shutdown is impacting the entire federal government, while the 2018-19 experience was only a partial shutdown, the experience this year is likely to have a larger impact. Our expectation is that quarterly annualised real GDP growth will be dampened by 0.2ppts per week of the federal government shutdown, almost double the experience of 2018-19. Our forecasts assume a two-week shutdown, depressing growth by 0.4ppts in Q4 2025. Although the shutdown could extend for longer and lead to a larger impact on growth in Q4, we would expect growth to rebound by a similar amount in early 2026 after the government reopens.
The increase in tariffs will weigh further on economic activity in the US over coming months. The tariffs are leading to a modest pick-up in consumer prices, with the core PCE inflation rate rising from 2.6% in April to 2.9% in August and we project a further increase to around 3.2% by late 2025 or early 2026. While consumer spending has remained resilient to date, the combination of rising prices, slowing employment growth and softening wages will lead to a modest slowdown in consumer spending in coming months. Some payback is also to be expected as many consumers front-loaded spending of durable goods ahead of the latest tariff increases in August.
Overall, we forecast real growth in the US economy to slow to around a 0.8% quarterly annualised pace in the December quarter, down from the 1.6% pace experienced over H1 2025 and likely growth of 2% or higher in the September quarter. Labour market conditions are expected to remain soft and this will see the unemployment rate in the US to rise from around 4.3% in August to 4.6% by early 2026. We expect the US Federal Reserve (Fed) will continue to look through the one-off, tariff-induced lift to inflation and focus on downside risks to the labour market, delivering another 25bp rate cut at both its October and December meetings.
Looking ahead to 2026, we anticipate a gradual recovery to build in the US economy. Increased fiscal stimulus from Trump’s One Big Beautiful Bill, combined with a further Fed rate cut to 3.375%, should help boost growth to around a 1.8% year-ended pace by Q4 2026 and 1.9% by 2027.
Similar trends are expected to emerge in the euro area economy. Growth is forecast to remain modest in the near-term due to external headwinds like the increase in tariffs, before picking up over 2026 and 2027 on a ramp up in defence spending across the region, with real GDP growth averaging around a 1-1½% pace. We expect core inflation to fall to the ECB’s 2% target next year and modestly undershoot target in 2027. The ECB has signalled that it is comfortable with its current policy settings, but we would advocate for a final rate cut to 1.75% to prevent inflation falling too far below target.
Growth in the UK economy is also expected to average around a 1-1½% pace over coming years, although the government’s November Budget will likely be required to unveil substantial fiscal tightening to comply with its fiscal rules. However, an eventual easing in inflationary pressures and a further 75-100bps of rate cuts by the Bank of England over 2026 and 2027 should help promote the recovery in the UK economy.
Momentum in the Chinese economy is slowing, partly due to the tariff shock, but also the government’s anti-involution policies that are seeking to reduce overcapacity in the economy. Reflecting these headwinds, and ongoing weakness in China’s property market and demographic challenges, we expect growth in China’s economy to slow from the 5.2% pace seen over the year to the June quarter to around a 4.1-4.2% pace in 2026 and 2027.
Unfortunately, heightened uncertainty is likely to remain a feature of the global economic landscape. While it will continue to weigh on global growth, we do not expect it will derail the global economy and spark a global recession. Our forecasts are for global growth to slow from a 3.3% pace in 2024 to a 2.9-3.1% pace between 2025 and 2027. If 2025 was the year of uncertainty, 2026 may indeed prove the year of muddling through.
