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World economy will slow sharply despite US-China tariff truce: Fitch
The de-escalation in US-China trade tensions has led Fitch to make upward revisions to growth forecasts compared to April. But the world economy still faces a sharp slowdown induced by the most severe trade war since 1930s, says the top ratings agency.
The recent de-escalation in US-China trade tensions has led Fitch Ratings to make broad-based upward revisions to its global growth forecasts compared to the previous Global Economic Outlook (GEO) published in mid-April.
But the world economy still faces a sharp slowdown induced by the most severe trade war since the 1930s, said Fitch in its June 2025 GEO.
Fitch now forecasts world GDP growth at 2.2% in 2025, an upward revision of 0.3pp since the April GEO. We have also raised our forecasts for growth in 2026 to 2.2% from 2.0%. These rates are well below the 2.9% recorded in 2024 and the longer-term average of 2.7%.
We have raised the US growth outlook for 2025 to 1.5% from 1.2%, with recession risks receding. But there are signs of an underlying slowdown in final domestic demand, and we expect consumption to slow in 2H25, stated the top ratings agency.
China’s 2025 growth forecast has also been raised to 4.2% from 3.9%. We revised up eurozone growth to 0.8% from 0.6%.
"Our latest estimate of the US Effective Tariff Rate (ETR) is 14.2%. Our base case assumes it will rise slightly further in the coming months, approaching the 18% rate assumed in the March GEO," it stated.
"This is well below the 27% rate assumed in the April GEO. Our latest GDP forecasts remain weaker than in the March GEO, however, reflecting extreme volatility in US trade policy in recent months which has increased uncertainty and will further weigh on growth," it added.
The tariffs have reduced US business and consumer confidence and prompted a spike in US imports in 1Q25 as US residents sought to front-run tariff increases. Inventories also rose sharply. There is little evidence of any impact on the US CPI so far, but upstream producer price and survey measures of price pressures have risen.
There have been downward pressures on US financial asset prices as reflected in equity market volatility, a weakening dollar and higher long-term 30-year government bond yields.
In China, fiscal easing is the key policy lever to offset the US tariff shock. But broader dollar weakness and ongoing falls in local-currency export prices could also help Chinese exporters to gain market share in other countries as China’s effective exchange rate falls, said Fitch in its report.
For Germany, US tariff hikes – including on autos – are yet another adverse external shock. But there have been some encouraging signs on domestic demand recently, and fiscal policy should help growth to recover in 2026.
The Federal Reserve is likely to be cautious about cutting rates as US growth slows, and we still expect only a single rate cut this year in 4Q25. Tariffs will push up inflation, labour force growth is slowing sharply, and some inflation expectation measures remain high.
"Recent oil price volatility adds further upside inflation risks. We have raised our 2025 annual average oil price assumption by $5 to $70 a barrel," said Fitch Ratings in its report.
"The ECB appears more comfortable with recent progress on wage and price disinflation, and we expect a further cut in rates to a below-neutral 1.75% in September," it added.-TradeArabia News Service