Global Economic Outlook: June 2025

The reaction of commodity and financial markets to the Israel-Iran conflict has been muted so far, but escalation could materially affect the economic outlook.

At the time of writing, the price of Dated Brent crude was around $76 per barrel (/b), US$8/b above its average in the two weeks prior to the initial missile strikes, and creeping upwards amid speculation of broader US involvement in the conflict.

The impact on major equity indices and sovereign bond markets had been modest, so too the boost to safe haven assets like the Swiss franc and gold prices. All will be highly sensitive to signs of escalation of the conflict.

A resulting closure of the Strait of Hormuz could materially shift the near-term outlook for energy prices, inflation, financial conditions, and growth. The key takeaway from a severe conflict escalation scenario run through our Global Link Model is large output losses versus baseline in the Middle East, Asia-Pacific and Europe given the importance of energy supply from Gulf producers. 

Even absent a conflict escalation, strength in first quarter growth rates is likely to fade. We have raised our real GDP growth forecasts for 2025-26 in many economies and most regions in our June forecast round, consistent with de-escalating trade tensions and somewhat more favorable financial conditions.

Still, our forecasts for this year and next generally imply below-potential outcomes, with projected growth rates below where they were prior to November 2024’s US elections. The front running of higher tariffs has led to stronger-than-expected first quarter growth rates in many economies, although this effect is already starting to unwind.

S&P Global’s Purchasing Managers Indexes (PMIs®) show a weakening of global growth momentum in the first two months of the second quarter. While the global composite output index picked up a little in May, along with business expectations for the year ahead, both measures remained rather weak by historical standards. A setback appears likely in June’s PMI® data given recent developments in the Middle East, while the early July deadline for the 90-day pause on US “reciprocal” tariffs is also looming.

The Federal Reserve’s caution over US inflation prospects is likely to linger, despite recent benign consumer price inflation (CPI) data. While May’s US CPI figures again failed to show any tariff-related effects, at least in part this is likely to reflect lags.

Businesses may still be working through their pre-tariff inventories or accepting temporary profit margin reductions. Notably, US producer price figures have started to show some tariff-related effects, while S&P Global’s PMI® data for the US also point to some pipeline price pressures. May’s input and output price indexes for US services, for example, showed their steepest rises since June 2023 and August 2022, respectively.

In contrast, recent PMI® data for mainland China signal that disinflationary forces are still apparent. While our consumer price inflation forecasts for 2025-26 were reduced for many economies in our June update, this largely reflected lower commodity price assumptions which had been incorporated prior to the Israel-Iran conflict. 

The depreciation of the effective US dollar index had resumed, prior to the Middle East tensions. The rebound in various measures of the trade-weighted dollar following April’s “reciprocal” tariff reversal proved short-lived, with the break in the hitherto positive correlation of the dollar and US Treasury yields indicative of a reduction in foreign appetite for US assets.

We expect a combination of factors — its still elevated level, weaker US growth, concern over policy developments, including fiscal prospects — to continue to weigh on the dollar. Although the Fed has been on hold, the dollar’s depreciation has been conducive to monetary policy easing outside of the US and this is expected to continue, providing some offset to trade and conflict-related headwinds, assuming that escalations are avoided.

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.