The global trade shock has moderated and the risks of a retaliatory spiral higher in tariffs have receded, so we’ve upgraded some of our growth forecasts and reduced the probability of a US recession. But uncertainty has not gone away and concerns over fiscal policy have grown, risking a sharp sell-off in long-dated bonds in developed markets.
Figure 1: Global forecast summary
Source: Aberdeen, June 2025
The US weighted average tariff rate currently stands at 12%, and we are now conditioning our baseline forecasts on this number rising only slightly from here.
Legal challenges to President Donald Trump's ‘reciprocal’ tariffs were always likely, but the strength of the ruling of the US Court of International Trade against the president’s ability to use the International Emergency Economic Powers Act (IEEPA) still came as a surprise.
Whether the administration wins its appeal will, in large part, come down to a ruling on the ‘major questions doctrine’ – effectively whether the executive branch can impose such sweeping changes without Congressional approval – and a judgement will likely be made in the next few months.
Should US courts uphold the decision, this has the potential to shift the power balance on tariff setting more in favour of Congress, which would reduce the risks of substantially higher tariffs. But the raft of alternative legislative options (e.g., Sections 122, 232, 301, 338) suggests that tariffs will remain an active policy tool of the executive branch. Bipartisan support for a ‘tough on China’ approach in particular means that we are assuming tariffs on Chinese imports will rise back to 40% or more.
However, looking through the noise, uncertainty will weigh on hiring, investment and durable goods consumption, while weaker real income growth will also slow the economy over the second half of this year. That said, we have lowered our 12-month US recession probability to around 30%, from almost 50%.
But while markets are less concerned about the tariff shock, they are increasingly on edge about fiscal policy in the US, and in developed markets more generally.
Reconciliation of Trump’s ‘One Big Beautiful Bill Act’ (OBBBA) could be concluded by July 4, or soon after, and we expect this to push the US fiscal deficit above 7% of gross domestic product (GDP) over the next two years, even if most tariff revenues find their way into government coffers.
Markets may also have concerns about the health of government finances elsewhere. European fiscal policy is being loosened to boost defence spending, the UK’s fiscal rules are likely to be breached again given little appetite for lower spending, and Japan may add some stimulus following the upper house elections.
Yields on government bonds with longer maturities may, therefore, remain under pressure worldwide, especially as higher issuance is running into structurally lower demand from fully-funded pension schemes.
All of this means the US Federal Reserve (Fed) finds itself in a tough policy environment, with pressures on both sides of its dual mandate – targeting maximum employment and stable prices – and financial markets likely to remain skittish.
We now expect the Fed to cut interest rates just once this year, in December, as the moderating trade shock and still uncertain fiscal policy reinforce a ‘wait-and-see’ approach. But should the data deteriorate rapidly, then more aggressive easing would be possible.
The tariff détente achieved following the US-China meeting in Switzerland on May 11 means we now forecast a more gradual, and modest, sequential growth slowdown in China than before. This will tone down the scale and urgency of further policy easing, but we still expect that the Chinese authorities will need to do more to support their economy.
The difficulty of securing a trade deal with the US, and existing legislation (e.g., Sections 232, 301) that provides an easy way for the US to raise tariffs on China, still point to economic decoupling being a long-term headwind to Chinese growth.
Emerging markets (EM) have escaped fairly unscathed from the recent pressure on long-end bond yields in developed markets. For example, the EMBI sovereign spread – the yield difference between emerging market government bonds and comparable US Treasuries – is little changed. That said, EM policymakers still have to contend with the uneven effects of US trade policy and market sensitivities to their own fiscal weakening.
The US dollar losing its reserve currency status is still very unlikely, but policy mistakes – such as following through on Section 899 within OBBBA that threatens retaliatory taxes on foreign investments – risk souring foreign appetite for US assets.
Temporary reprieve
US policies governing trade, spending and taxation remain sources of deep uncertainty for the global economy, even though we have scaled down our forecasts of the size of the tariff-induced shock.The US weighted average tariff rate currently stands at 12%, and we are now conditioning our baseline forecasts on this number rising only slightly from here.
Legal challenges to President Donald Trump's ‘reciprocal’ tariffs were always likely, but the strength of the ruling of the US Court of International Trade against the president’s ability to use the International Emergency Economic Powers Act (IEEPA) still came as a surprise.
Whether the administration wins its appeal will, in large part, come down to a ruling on the ‘major questions doctrine’ – effectively whether the executive branch can impose such sweeping changes without Congressional approval – and a judgement will likely be made in the next few months.
Should US courts uphold the decision, this has the potential to shift the power balance on tariff setting more in favour of Congress, which would reduce the risks of substantially higher tariffs. But the raft of alternative legislative options (e.g., Sections 122, 232, 301, 338) suggests that tariffs will remain an active policy tool of the executive branch. Bipartisan support for a ‘tough on China’ approach in particular means that we are assuming tariffs on Chinese imports will rise back to 40% or more.
More concerns ahead
In any case, while the softening in trade actions and rhetoric has helped stabilise many markets, the economic consequences are only just beginning. Data will likely be scrambled over coming months, with US first-quarter growth contracting, due to a surge in imports ahead of the imposition of tariffs, but an offsetting boost to inventories and sales likely to show up as a strong second quarter.However, looking through the noise, uncertainty will weigh on hiring, investment and durable goods consumption, while weaker real income growth will also slow the economy over the second half of this year. That said, we have lowered our 12-month US recession probability to around 30%, from almost 50%.
But while markets are less concerned about the tariff shock, they are increasingly on edge about fiscal policy in the US, and in developed markets more generally.
Reconciliation of Trump’s ‘One Big Beautiful Bill Act’ (OBBBA) could be concluded by July 4, or soon after, and we expect this to push the US fiscal deficit above 7% of gross domestic product (GDP) over the next two years, even if most tariff revenues find their way into government coffers.
Spotlight on government finances
Moreover, the risks are skewed towards an even greater worsening of the US budget deficit, in part because tariff revenues could be lower (the flip side of a less aggressive tariff policy, or faster trade re-routing), or because a greater share could be used to offset some of the damage caused by the trade war.Markets may also have concerns about the health of government finances elsewhere. European fiscal policy is being loosened to boost defence spending, the UK’s fiscal rules are likely to be breached again given little appetite for lower spending, and Japan may add some stimulus following the upper house elections.
Yields on government bonds with longer maturities may, therefore, remain under pressure worldwide, especially as higher issuance is running into structurally lower demand from fully-funded pension schemes.
All of this means the US Federal Reserve (Fed) finds itself in a tough policy environment, with pressures on both sides of its dual mandate – targeting maximum employment and stable prices – and financial markets likely to remain skittish.
We now expect the Fed to cut interest rates just once this year, in December, as the moderating trade shock and still uncertain fiscal policy reinforce a ‘wait-and-see’ approach. But should the data deteriorate rapidly, then more aggressive easing would be possible.
Slower growth
Elsewhere, the shock from US policy remains disinflationary – slowing the rate of price rises. We expect this will spur one more cut by the European Central Bank (ECB), taking policy below the neutral 2% level. More cuts would occur if the US pushes ahead with a 50% tariff on European imports on July 9.The tariff détente achieved following the US-China meeting in Switzerland on May 11 means we now forecast a more gradual, and modest, sequential growth slowdown in China than before. This will tone down the scale and urgency of further policy easing, but we still expect that the Chinese authorities will need to do more to support their economy.
The difficulty of securing a trade deal with the US, and existing legislation (e.g., Sections 232, 301) that provides an easy way for the US to raise tariffs on China, still point to economic decoupling being a long-term headwind to Chinese growth.
Emerging markets (EM) have escaped fairly unscathed from the recent pressure on long-end bond yields in developed markets. For example, the EMBI sovereign spread – the yield difference between emerging market government bonds and comparable US Treasuries – is little changed. That said, EM policymakers still have to contend with the uneven effects of US trade policy and market sensitivities to their own fiscal weakening.
US: no longer special?
Stepping back, US exceptionalism – the idea that the US enjoys unique structural advantages that consistently make it a more attractive place to invest – remains under pressure. Certainly, the IEEPA court ruling offers a reminder of US institutional strengths. But the policy mix still points to slowing potential growth, while uncertainty remains high.The US dollar losing its reserve currency status is still very unlikely, but policy mistakes – such as following through on Section 899 within OBBBA that threatens retaliatory taxes on foreign investments – risk souring foreign appetite for US assets.