RESEARCH — May 19, 2025
Global Economic Outlook: May 2025
By Ken Wattret
Tariff and trade-related risks and uncertainties have diminished but not disappeared. April’s US reversal on tariffs and May’s subsequent agreement with mainland China to substantially reduce tariffs have had significant near-term effects on financial and commodity markets, with equity indices, crude oil prices and the US dollar rebounding on the news.
There are grounds for caution on economic prospects in the global economic outlook nonetheless. The recent de-escalation could become a re-escalation should trade negotiations falter. Also, sector-specific tariffs are not included in the US-China agreement, and the effective US tariff rate is set to remain well above its pre-election level. Moreover, the damage to confidence stemming from the radical shift in US trade policy, along with its unpredictability, is likely to linger, especially with potential US tariff increases across a range of key products still under investigation.
The reductions in US and Chinese tariffs were agreed faster and went further than assumed in our May forecast update. We had incorporated more gradual declines in tariffs from the second half of 2025, suggesting some upside risk to our baseline growth forecasts. Our global real GDP growth forecasts for 2025 and 2026 remain unchanged in May’s update at 2.2% and 2.4%, respectively, although this followed substantial downward revisions over the prior few months. Across most of the world’s largest economies, our growth forecasts for 2025 and 2026 are broadly stable in the latest update. However, we have slightly revised up the projections for China to reflect a stronger-than-expected start to this year and more substantial policy stimulus.
S&P Global’s Purchasing Managers IndexTM (PMI®) data continue to signal a weakening of growth momentum. Despite a boost to manufacturing and trade from the front-loading of activity to avoid expected higher tariffs, April’s composite PMI figures were significantly weak. The global composite output index fell to 50.8, marking its third decline in four months and signaling below-potential global real GDP growth. April’s data on expected business conditions also deteriorated, pointing to further weakness ahead in the global economic outlook, although the surveys are yet to capture the US-China trade agreement.
The front-loading of activity to avoid expected rises in tariffs is distorting economic data. While US real GDP contracted in the first quarter of 2025, this was primarily owing to a surge in US imports. Final sales to domestic purchasers (i.e., personal consumption and investment spending) remained solid, rising at a 3% quarter-over-quarter annualized rate. The surge in US imports corresponds with a rise in exports to the US, temporarily boosting growth rates elsewhere. The front-running of trade shipments and the building of inventories could be extended by the pause in tariffs and the recent US-China agreement, increasing the likelihood of a subsequent correction down the line and complicating an assessment of underlying growth momentum.
Although tariff-related effects on goods prices have been in focus, services disinflation is becoming more pronounced. The monthly consumer price inflation rate for services that we calculate for the Group of Five (G5) economies dropped by a cumulative 0.5 percentage point in February and March to 3.5%, the lowest rate since February 2022 and almost 3 percentage points below the pandemic-driven peak in February 2023. The G5 core goods inflation rate continued its gradual upward trend, rising to 0.6%, its highest in a year. S&P Global’s PMI data continue to signal further gradual upward pressure on goods inflation rates.
April’s US consumer price data showed little signs of tariff-related effects. This could be explained by firms drawing down inventories purchased before the tariffs take effect or temporarily reducing profit margins. Both factors imply only a temporary reprieve from a tariff-induced pickup in core inflation. Although attention has been centered on the possible effects of tariffs on goods prices, service inflation continues to be the main driver of overall inflation dynamics. In April, core US services inflation fell 3.6%, its lowest level since November 2021 and way down from 5.3% in the same month a year earlier. The 2025 consumer price inflation forecasts for many economies have been lowered slightly in our May update to reflect somewhat lower commodity price assumptions.
US dollar depreciation, and improving inflation prospects, points to more accommodative global financial conditions. Between mid-January and early May, the broad nominal effective (i.e., trade-weighted) dollar index compiled by the US Federal Reserve fell by about 6%. Against the currencies of advanced economies, the depreciation was close to 10%. Receding concerns about currency weakness potentially open the door to earlier and more monetary policy easing outside of the US in our global economic outlook, although a sustained dollar rebound (not our base case) could limit the room for rate cuts.
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.