The global economy is forecast to grow solidly in 2025 despite trade uncertainty

Goldman Sachs Research forecasts another solid year of global economic growth in 2025. Our economists project the US will outperform expectations while the euro area lags behind amid fresh tariffs that are anticipated from the Trump administration.

Worldwide GDP is forecast to expand 2.7% next year on an annual average basis, just above the consensus forecast of economists surveyed by Bloomberg and matching the estimated growth in 2024. US GDP is projected to increase 2.5% in 2025, well ahead of the consensus at 1.9%. The euro area economy is expected to expand 0.8%, compared to the consensus of 1.2%.

"Global labor markets have rebalanced," Goldman Sachs Research Chief Economist Jan Hatzius writes in the team's report titled "Macro Outlook 2025: Tailwinds (Probably) Trump Tariffs." "Inflation has continued to trend down and is now within striking distance of central bank targets. And most central banks are well into the process of cutting interest rates back to more normal levels."

The world's largest economy is expected to grow faster than other developed-market countries for the third year in a row. The re-election of US President Donald Trump is predicted to result in higher tariffs on China and on imported cars, much lower immigration, some fresh tax cuts, and regulatory easing. "The biggest risk is a large across-the-board tariff, which would likely hit growth hard," Hatzius writes.

Will changes in trade increase US inflation?

US core PCE inflation should slow to 2.4% by late 2025, higher than Goldman Sachs Research's prior forecast of 2.0% but still a benign level. The forecast would rise to around 3% if the US imposes an across-the-board tariff of 10%. In the euro area, our economists expect core inflation to slow to 2% by late 2025. The risk of ultra-low inflation in Japan has abated.

"A key reason for optimism on global growth is the dramatic inflation decline over the past two years," Hatzius writes. "This directly supports real income because price inflation has fallen far more quickly than wage inflation."

"Just as importantly, the inflation decline also indirectly supports demand by allowing central banks to normalize monetary policy and thereby ease financial conditions," he adds.

Goldman Sachs Research expects the US Federal Reserve to cut its policy rate to 3.25-3.5% (from 4.5% to 4.75% now), with sequential cuts through the first quarter and a slowdown thereafter. The European Central Bank, meanwhile, is expected to lower its policy rate to a terminal rate of 1.75%. Our economists find that there's also significant room for policy easing in emerging markets. By contrast, the Bank of Japan is projected to lift its policy rate to 0.75% by the end of 2025.

How will Trump's trade policy impact the US economy?

The effects of potential new US trade policies on US GDP are expected to be small and largely offset by other factors, according to Goldman Sachs Research's baseline outlook. Potential tariffs would result in a modest hit to real (inflation adjusted) disposable personal income via higher consumer prices. The uncertainty of how much further trade tensions might escalate would likely weigh on business investment.

"Assuming that the trade war does not escalate further, we expect the positive impulses from tax cuts, a friendlier regulatory environment, and improved 'animal spirits' among businesses to dominate in 2026," Hatzius writes.

In Goldman Sachs Research's base case, trade policies may have a net drag of 0.2 percentage points on US GDP in 2025. If larger than anticipated across-the-board tariffs are implemented, that could cause a net drag averaging 1 percentage point in 2026 (though it could be lower if tariff revenue is fully recycled into tax cuts).

The US has grown faster than other big economies and is predicted to continue doing so. Goldman Sachs Research points out that labor productivity in the US has increased at a 1.7% annualized rate since late 2019, a clear acceleration from the pre-pandemic trend of 1.3%. By contrast, labor productivity in the euro area has grown at a 0.2% annualized rate over the same period, a clear deceleration from 0.7% before the pandemic.

"We expect US productivity growth to remain significantly stronger than elsewhere, and this is a key reason why we expect US GDP growth to continue to outperform," Hatzius writes.

How US trade policies may affect other economies

The economic headwind from US trade policy is expected to be greater outside the US. In the euro area, a rise in trade policy uncertainty to the peak levels of the trade conflict in 2018-19 would subtract 0.3% from GDP in the US but as much as 0.9% in the euro area.

Our economists reduced their growth forecast for the euro area in 2025 following the US election results by 0.5 percentage points (fourth quarter over fourth quarter) and would likely cut it further if the US imposes an across-the-board tariff.

Goldman Sachs Research expects the impact of potential US trade policy on China to be even more direct. The world's second-largest economy may face tariff increases of up to 60 percentage points and average 20 percentage points across all exports to the US. That's forecasted to subtract almost 0.7 percentage points from growth in China in 2025. Our economists reduced their 2025 growth forecast modestly, by 0.2 percentage points on net to 4.5%, assuming Chinese policymakers provide stimulus and some of the growth hit is offset by depreciation in the renminbi.

"However, we would likely make larger downgrades if the trade war were to escalate further," Hatzius writes.

Likewise, other countries are also likely to be buffeted by US trade policy. Goldman Sachs Research expects larger drags in more trade-exposed economies, while certain emerging market countries could get a boost by gaining export share if trade shifts away from China.

Overall, however, global economic growth is expected to be solid despite the potential for US tariffs. Our economists estimate that changes to US trade policy will subtract 0.4% from global GDP, while increased policy support should dampen the hit. But much depends on the size of any new trade restrictions. The impact could be two to three times larger if the US imposes a 10% across-the-board tariff.

"Barring a broader trade war, policy changes in the second Trump administration are unlikely to change the broad contours of our global economic views," Hatzius writes.