April 2025 update to TIGER: The world economy shudders and could stall

The eurozone economy continues to operate on two tracks. Core economies such as Austria, France, and Germany remain mired in low growth and face enormous fiscal pressures, particularly as political turmoil pushes up borrowing costs. By contrast, the economies of Greece, Italy, Portugal, and Spain have held up better. Disruptions to international trade are likely to take a toll on manufacturing powerhouses in Europe and elsewhere. The Japanese and U.K. economies were experiencing modest growth but their underlying fragilities, and lack of room for policy maneuver, are likely to be exposed by trade tensions.

China’s economy, which had been steadying after a rough patch, now faces major challenges. Expanding industrial capacity has not been matched by domestic demand, as reflected in persistent deflationary pressures, making China particularly vulnerable to an all-out trade war with the United States. China has faced escalating U.S. tariffs with bravado, retaliating with its own tariffs on U.S. imports and other measures meant to inflict pain on the U.S. economy. However, there is a limit to this strategy given China’s weak economy, especially as other countries are already taking steps to fend off the prospect of a flood of Chinese exports landing on their shores. China does have room to deploy fiscal and monetary policy tools to bolster domestic consumption, but these are likely to prove effective only if supplemented with broader reforms that serve as confidence-building measures.

India’s economy continues to perform well, fueled by strong rural consumption and a robust services sector. Expanding domestic demand, resilient financial markets, and its role as an alternative supply chain base as U.S. corporations shift out of China have insulated India from the worst of the repercussions of tariffs. In Brazil, an uptick in consumer spending helped offset declining exports in 2024, but loose fiscal policy and the resulting inflation and weak real, along with tumbling consumer and business confidence, suggest a challenging year ahead. South Africa is struggling with persistent power shortages, sluggish growth, and a weakening currency.

The twin shocks of U.S. tariffs and rising excess capacity in China will severely crimp growth in emerging market and developing countries, such as those in Southeast Asia that are heavily reliant on exports. Trade disruptions, growing debt-servicing burdens, and scaled-back foreign aid flows as the major economies recalibrate their spending will exact an especially high toll on low-income countries in Africa and elsewhere.

The era of increasingly free and unfettered trade has come to a crashing end as the Trump tariffs lead to a widespread surge of protectionist measures. Trump has taken the hatchet to trade with practically every major U.S. trading partner, sparing few allies or rivals and setting off a new era of protectionism that will reverberate worldwide.

A full-scale retreat is hardly in prospect but, no matter how the tariffs eventually play out, patterns of international trade are shifting. In fact, even before Trump wielded his tariff hatchet, trade was already becoming fragmented in line with growing geopolitical fissures. Finance tends to follow trade, so trade fragmentation is resulting in weaker overall economic linkages between countries. Even if the tariff wars ease up as the economic consequences sink in, corporations around the world are now forced to confront a much more uncertain and volatile trade landscape.

It is premature to assert that a worldwide recession is around the corner, but the breakdown of global trade and elevated policy uncertainty will undoubtedly suppress growth. Each country will need to conserve whatever macro policy space it has and deploy those tools to maximum effect if growth slows down sharply. Reforms to make their own economies more flexible and resilient, along with measures to boost domestic demand, will become crucial for weathering the turbulence.