MUMBAI: Rating agency Fitch Ratings has slashed the global growth forecast for 2025 to 2.3% from 2.9% projected in December and that of the US by 40 bps to 1.7% due to the ongoing tariff war. The agency, while warning of a spike in inflation in the US and the resultant tight monetary policy, has also warned of deep recession in Mexico and Canada as they export almost 75% of their entire shipments to the US.
The ongoing global trade war will reduce the US and world growth, push up inflation in the world’s largest economy and delay Federal Reserve’s rate cuts, Fitch’s chief economist Brian Coulton said in a note Wednesday, while remaining silent on the impact of the tariff war on India.
“We’ve cut our US 2025 growth forecast to 1.7% from 2.1% in the December outlook and our 2026 forecast to 1.5% from 1.7%. These rates are well below trend and down from almost 3% annual growth in 2023 and 2024.
“The trade war will impact global growth to the tune of 60 bps and we expect world growth to slow to 2.3% this year, well below trend and down from 2.9% in 2024. This is a downward revision that reflects broad-based reductions in developed and emerging economies. Growth will remain weak at 2.2% in 2026,” Coulton said.
The only silver-lining is the fiscal easing in China and Germany which will cushion the impact of higher US import tariffs, but growth in the Eurozone as a whole will still be a lot weaker this year than the December forecast, he added.
“Mexico and Canada will experience recession given the scale of their US trade exposures, and we have cut their annual 2025 forecasts by 110 bps and 70 bps, respectively,” the agency said.
The size, speed, and breadth of the US tariff hikes since January is staggering, Coulton said, adding the US effective tariff rate (ETR) has already risen to 8.5% from 2.3% in 2024 and is likely to rise further.
This will push up US inflation by 100 bps, forcing the Fed to remain on hold on the rates front. Given this the agency does not see any rate cuts before the fourth quarter.
“Our latest forecasts assume a 15% ETR will be imposed on Europe, Canada, Mexico, and others in 2025, and 35% on China. This will push the US ETR to 18% this year before moderating to 16% next year as the ETR on Canada and Mexico falls to 10%. This would be highest rate in the past 90 years,” Coulton said, adding there are also risks of a larger tariff shocks including from an escalating global trade war.
Higher tariffs will result in higher US consumer prices, reduce real wages, and increase companies’ costs, and the surge in policy uncertainty will take a toll on business investment. Retaliation will hit US exporters.
Export-oriented global manufacturers in East Asia and Europe also will be affected and this can reduce GDP by about 100 bps in the US, China, and Europe in 2026. Germany’s recent pivot to fiscal stimulus will do a lot to cushion the blow and will allow its economy to recover modestly in 2026. More aggressive policy easing will also help to offset the impact in China.