Global Economic Outlook: August 2025

We have revised up our annual real GDP growth forecasts for 2025 for several major economies in our August update, including the US, Canada, the eurozone, the UK and mainland China. These adjustments largely reflect stronger-than-expected GDP releases for the second quarter.

Our global Purchasing Managers Indexes (PMIs®) have also continued their recent improvement, with the global composite output index rising for the third straight month in July. The pick-up in the composite PMI® was not broad-based across countries or sectors, with manufacturing PMIs® generally still struggling and future output expectations remaining weak.

Tariff frontrunning effects continue to complicate an assessment of underlying growth trends. Our real GDP growth forecasts for India and Brazil have been lowered for 2025 and 2026, reflecting much higher US tariffs than previously assumed.

We continue to forecast weaker quarter-over-quarter real GDP growth rates across most regions during the second half of 2025. This scenario reflects various headwinds, including a jump in the effective US tariff rate, the unwinding of the boost from tariff frontrunning, persistently high uncertainty and still restrictive monetary conditions in many economies.

On the positive side, our forecasts still imply a brief soft patch for global growth. Momentum will likely improve in most regions during 2026, supported by the lagged effects of more accommodative monetary policies and additional fiscal stimulus in some key economies, including the US and Germany. The Middle East is a notable exception in 2026, reflecting expected declines in oil prices.

Trade- and tariff-related uncertainties remain a source of downside risk. The US reciprocal tariff announcements in August have contributed to generally positive financial market sentiment, with most trading partners receiving lower tariffs compared to the initial batch in early April. 

There are grounds for caution, nonetheless, including the evolution of Section 232 tariffs. Negotiations between the US and some of its key trading partners, including mainland China, Canada and Mexico, are ongoing, while some of the recently agreed framework trade deals could also run into difficulties. Although measures of trade policy uncertainty are below their extreme highs earlier in the year, they remain very elevated by historical standards.

The effects of higher tariffs are becoming more apparent in US goods inflation. Although firms initially mitigated tariff-related cost pressures by depleting their pre-tariff inventories and reducing margins, consumer price inflation data for June and July showed signs of an increased pass-through to some prices. Core goods inflation rose by 0.5 percentage point to 1.1% in July, the highest rate since June 2023.

Producer price inflation figures and S&P Global’s PMI data for July also signaled relatively elevated pipeline price pressures for goods in the US, with the latter’s manufacturing input and output price indexes well above their historical averages in recent months.

In contrast, the PMI pricing surveys continued to signal muted pressures in many other major economies, including the eurozone and mainland China. Our assumptions for crude oil prices in 2026 were slightly lowered in our August update, with excess supply still expected to lean down on prices from late 2025. 

An earlier resumption of US policy rate cuts has become more likely given softer employment data. Still, our base case remains for a next cut of 25 basis points in December, reflecting the US Federal Reserve’s lingering concerns about a tariff-induced pickup in inflationary pressures. Futures markets are still almost fully pricing in a cut of 25 basis points at the Fed’s next meeting in September, following July’s inflation data, with about 60 basis points of cuts discounted in total over the final three policy meetings of the year. 

Looking further out, futures markets price in a federal funds’ target rate of about 3% by end-2026, versus the current 4.25%-4.50% range, which broadly matches our current forecast. Changes in Fed personnel are likely to exert downward pressure on policy rates, along with raising some doubts about the commitment to the inflation target and the stability of inflation expectations.

Prospects for monetary policy easing elsewhere have become more uncertain. While improving inflation prospects are forecast to allow many central banks to extend their rate-cutting cycles, currency weakness could limit the speed and magnitude of those adjustments, potentially hindering the forecast growth upturns during 2026.

Currency constraints on policy rate cuts would be aggravated by a sustained US dollar rebound. Despite its recent stabilization following a difficult first half of 2025, we consider this unlikely and expect weaker growth and ongoing policy uncertainties to continue weighing on the dollar.

For the European Central Bank, which has halved policy rates from their post-pandemic peak, we no longer expect an additional cut from the current 2%, consistent with the current pricing of futures markets.

Increasing signs of economic weakness indicate that some emerging economy central banks, including those in Brazil and Russia, are transitioning away from their restrictive monetary policy stances.