The Global Imprint of U.S. Tariffs: Calm Before the Storm

In a new Global Economic Outlook & Strategy report from Citi Research, a team of analysts and economists led by Chief Economist Nathan Sheets looks at how U.S. tariffs continue to leave an imprint on our forecast for the global economy. We now see global growth at 2.3% in 2025, down from 2.8% last year. Developed-markets economies are hit particularly hard, with growth falling to just above 1%; the slowdown for emerging markets is more limited. We see growth rebounding only anemically in 2026, edging up to 2.4%.

But we also note that so far the global economy has absorbed the tariff uncertainties and shown continued resilience, with the pace of activity looking to have slowed by only a notch. Recent global data have generally matched or even exceeded expectations, and global Purchasing Managers Indexes (PMIs) have remained solid. Global equity markets are now well off their post-Liberation Day lows and moving back toward recent peaks.

But part of this resilience reflects that U.S. tariffs are being phased in only gradually, with their full restraining effects not yet felt, and households and firms have spent earlier to get ahead of the tariffs. For households, this has meant increased consumption of autos and electronics; for firms this front-loading has shown up as accelerated accumulation of inventory.

The upshot is that U.S. imports have soared, rising nearly 30% in March from October levels. Rather than restraining U.S. demand for foreign goods, the tariffs appear to have stimulated it, providing an important engine of support for the global economy in recent months. 

The implication, however, is that once the full effects of the tariffs are felt (likely over the next few months), spending could face a double blow: The tariffs should reduce real purchasing power, and those front-loaded purchases will need to be “paid back.”

We see another encouraging development in the pragmatism shown by the White House in moving to implement the tariffs. Such steps include the 90-day pause on reciprocal tariffs, carve-outs for electronics, and an agreement with China to ease the trade war. The White House also looks poised to sign a broad set of trade deals before the pause on reciprocal tariffs expires in early July.

Given these recent developments, we’ve marked up our global growth forecast; in aggregate, our projection for 2025 is up 0.2 percentage point (pp) from its April trough, with our 2026 projection up 0.1 pp. But we’re not inclined to upgrade the outlook more aggressively, as we’re likely still in the “calm before the storm.” We continue to expect a significant slowdown in second-half growth, and we remain concerned about downside risks.

In this environment, global inflation has stayed on a downward trajectory. Headline inflation has now returned to 2%. Core inflation has also fallen, but is still running a bit higher than before the pandemic. Going forward, we expect global inflation to remain contained because of below-trend global growth, as well as our expectation that oil prices will remain flat and low. As the tariffs hit, inflation should notably rise in the U.S., but could move lower elsewhere.

Tariff uncertainties

In recent months the global economy and financial markets have felt the effects of two kinds of uncertainty: policy uncertainty due to the numerous zigs and zags in the implementation of tariffs, and economic uncertainty that’s also been elevated. Tariffs under the Trump administration are slated to be the most aggressive in decades, and come after many years of global integration, arguably leaving the global economy more sensitive to such shocks. As such, markets have also struggled with uncertainty about how a given set of tariffs will pass through into growth, inflation and other key economic variables.

If there’s any good news, it’s that recent trade deals have seemingly diminished the level of policy uncertainty on tariffs. The White House appears to have pivoted into negotiation mode: In coming weeks we expect a truckload of further trade deals, with countries near the front of the line including Japan, South Korea, India, Saudi Arabia, Australia and potentially Vietnam. We see the U.S. seeking concessions from trading partners in five major buckets: (1) reduced tariffs on U.S. exports; (2) increased purchases of U.S.-produced goods; (3) exchange rate policies; (4) rules of origin and limiting re-exports from China; and (5) non-tariff barriers. We’re also awaiting announcements about sectoral tariffs on pharmaceuticals, electronics, copper and lumber.

We now expect the U.S. tariff regime to broadly converge to 10% reciprocal tariffs and 25% sectoral tariffs, with an additional continuing penalty on Chinese goods. Currently this has taken the form of 20% fentanyl tariffs, but this could change over time. Finally, the United States–Mexico–Canada (USMCA) agreement is likely to remain a favored corridor for U.S. trade, with the lion’s share of imports entering with tariffs at or near zero. 

These assumptions imply an effective U.S. tariff rate of roughly 15%, compared with just 2.5% when President Trump took office in January. Such tariffs are likely to take 1 pp off the level of U.S. GDP during the coming four to six quarters, and would raise U.S. prices by a similar quantum. For the global economy, the GDP effects would be roughly half as large, at around 0.5 pp.

Implications for central banks

This discussion highlights an important observation: The tariffs are a different kind of shock in the U.S. from the rest of the world. For the U.S., the tariffs will likely be stagflationary, pushing up prices and constraining spending. But for the rest of the world, the tariffs will be an external demand shock, constraining exports; the result will likely be weaker growth and lower prices. Recent readings on the “input prices” component of manufacturing PMIs hint at this divergence: For the U.S., the measure has risen sharply in recent months, but it’s been flat or even declined slightly for the rest of the world.

Accordingly, the policy prescription for the U.S. Federal Reserve is different from that for other central banks. For the Fed, the tariffs are pushing the economy away from both objectives of its dual mandate: Hike to fight inflation, or cut to support growth and employment?

We see the Fed as likely to be patient and “wait and see.” Only after the economy slows will there be a good case for rate cuts. Such conditions should prevail by the fourth quarter, but under other scenarios (including our U.S. team’s baseline), it could happen even more rapidly.

For other central banks, the prescription is clearer: The tariffs should prompt them to ease policy relative to their pre-tariff baselines. Central-bank tools are well designed to counter adverse demand shocks. To date, the European Central Bank has led the cutting parade with 175 basis points (bp) of cumulative cuts, and we expect another 75 bp in cuts this year. The Bank of England began an easing cycle earlier this month and we expect the pace of cuts to gain steam. Similarly, since the year began we’ve trimmed expectations for forthcoming rate hikes from the Bank of Japan and Brazil’s central bank.

More broadly, there’s debate about why central banks other than the Fed aren’t moving more aggressively to cut rates. Even with the prevailing uncertainties, the direction of the shock for these economies is clear.

Several factors appear to be in play. First, a natural response to the greater uncertainty is to “wait and see” where tariff rates ultimately land and get a better sense of the economic effects. Second, activity in many countries has remained relatively firm, and banks are hesitant to cut rates pre-emptively with the inflation shock of 2021 still fresh in mind. Third, while the dollar has fallen in the wake of the tariffs, some central banks no doubt worry that cuts could drive a weakening of their currencies, which could boost inflation. Fourth, some central banks have gauged their policies relative to the Fed’s, and may hesitate to begin easing while the Fed is still emphasizing patience. We expect that over time, these central banks will see the need to go their own way.