The recent actions taken by the new US administration have initiated a global trade war, which is expected to have significant ramifications on both US and worldwide growth. Fitch Ratings has revised its growth forecasts downward, lowering the US economy’s projected growth for 2025 from 2.1% to 1.7% and for 2026 from 1.7% to 1.5%.
These revised rates are considerably below historical trends, especially when compared to the nearly 3% annual growth recorded in 2023 and 2024. Fiscal measures in China and Germany may mitigate the impact of heightened US import tariffs; however, growth across the eurozone is still predicted to fall short of expectations set in the previous December Global Economic Outlook.
Additionally, Mexico and Canada are expected to face technical recessions due to their substantial trade reliance on the US, prompting a forecast reduction of 1.1 percentage points for Mexico and 0.7 for Canada in their 2025 growth rates. Globally, growth is anticipated to decelerate to 2.3% in the current year, down from 2.9% in 2024.
This overall reduction reflects a broader slowdown in both developed and emerging markets, with a weak growth forecast of 2.2% continuing into 2026. The scale and speed of US tariff increases since January have been unprecedented.
The effective tariff rate (ETR) has escalated from 2.3% in 2024 to 8.5% this year. Projections indicate a further rise to 15% for various nations, including Canada and Mexico, and 35% for China in 2025.
This could position the ETR at its highest level in 90 years. While there remains uncertainty regarding these tariff policies, potential risks could exacerbate the situation further.
These tariff hikes are expected to drive up consumer prices in the US, diminish real wages, and cause costs for companies to increase. The resulting policy volatility may adversely affect business investment, and retaliation is likely to impact US exporters.
In light of these challenges, Germany’s recent shift towards fiscal stimulus could help soften the economic blow, facilitating a modest recovery in 2026.