In a recent report titled Global Economic Outlook & Strategy: The Global Imprint of U.S. Tariffs — Calm Before the Storm, Citi Research, led by Chief Economist Nathan Sheets, provides a sobering analysis of the global economic landscape in 2025, with a particular focus on the impact of U.S. tariffs.
The report projects global growth at 2.3% for 2025, a notable decline from 2.8% in 2024, with developed economies bearing the brunt of the slowdown, expected to grow at just above 1%.
Emerging markets, while also affected, are projected to experience a less severe decline.
This anticipated economic deceleration, particularly in the second half of 2025, underscores the report’s characterization of the current period as a deceptive “calm before the storm.”
The U.S. tariffs, described as the highest in over a century, represent a stagflationary shock to the U.S. economy, simultaneously driving up consumer prices and dampening economic growth.
Citi estimates that these tariffs could increase U.S. consumer price inflation by 1–2 percentage points over the next four quarters, while reducing U.S. growth by approximately 2 percentage points in the same period.
In extreme scenarios, inflation could climb as high as 4%, with growth potentially stalling near zero.
For the global economy, the tariffs are an adverse demand shock, reducing demand for foreign goods in the U.S. and potentially lowering global growth by up to 1 percentage point over the next four to five quarters, bringing it to around 2%.
Despite the grim outlook, the global economy has shown resilience thus far, largely because the tariffs are being phased in gradually.
Households and firms have preemptively increased spending to get ahead of the tariffs, leading to a surge in U.S. imports—up nearly 30% from October 2024 to March 2025.
This front-loading has temporarily bolstered global economic activity, with households stocking up on goods like autos and electronics and firms accumulating inventories.
However, this short-term boost masks a looming challenge.
Once the tariffs’ full effects take hold, likely in the coming months, reduced purchasing power and the need to “pay back” these front-loaded purchases could deliver a significant blow to consumer and business spending.
Encouragingly, the White House has shown some pragmatism in its tariff implementation.
A 90-day pause on reciprocal tariffs, carve-outs for electronics, and negotiations with China to ease trade tensions have led Citi to revise its global growth forecast upward by 0.2 percentage points for 2025 and 0.1 percentage points for 2026.
The administration’s moves toward broader trade deals before the pause expires in early July also signal potential relief.
However, Citi remains cautious, warning that the global economy is not yet out of the woods.
The report emphasizes that the anticipated slowdown in the second half of 2025 could still materialize, with downside risks persisting.
The tariffs are also expected to generate significant revenue for the U.S. government, with estimates suggesting $700–750 billion annually, though “slippage” from factors like rerouting exports through low-tariff jurisdictions could reduce this to around $500 billion, or 1.7% of GDP.
The Trump administration faces a critical decision on how to use these funds.
Options include tax cuts, which could offset some growth losses but exacerbate inflation, or deficit reduction, which could stabilize long-term Treasury yields but delay economic support.
For central banks, the tariffs create a complex policy environment.
The U.S. Federal Reserve faces a unique challenge, as inflationary pressures may limit its ability to cut rates aggressively, unlike other central banks that may respond to weaker growth with looser policy.
Citi’s CEO, Jane Fraser, noted that while most business clients can absorb 10% tariffs, higher rates, such as 25%, could strain investment and hiring decisions, further clouding the economic outlook.
As the global economy navigates this period of uncertainty, Citi’s report serves as a critical reminder of the tariffs’ far-reaching implications.
While recent resilience and policy adjustments offer some hope, the potential for a significant economic slowdown looms large, urging businesses, investors, and policymakers to prepare for turbulent times ahead.