Tariffs & Global Resilience — Waiting for Another Shoe to Drop

In a new report from Citi Research, Chief Economist Nathan Sheets and a team of analysts and economists outline their expectations for global growth. While noting the global economy’s surprising resilience, they warn that there’s another shoe still to drop: Tariffs are increasingly biting, which is likely to bring further softening in U.S. consumption and import demand. 

The economy cooled a notch during the year’s first half, as tariff-related uncertainty restrained spending, but activity held up better than expected. Growth looks to have run at 2.6% during the first half, compared with 2.8% last year, and monthly data such as the global services purchasing managers’ index (PMI) indicate this solid performance has continued into the third quarter. 

We see several factors behind this resilience. For one, the expectation of rising tariffs prompted U.S. households and firms to front-load purchases of imported goods, causing U.S. imports to run on average well above 2024 levels. And we note that over the last five years, the global economy has shaken off a series of shocks; global growth hasn’t been rapid, but it has been solid. Clearly, the global economy has shown remarkable flexibility and a capacity to adjust to even sizable economic shocks.

But we continue to believe there’s another shoe to drop. The tariffs are increasingly biting: In August, monthly tariff collections reached $30 billion, or $360 billion annualized, up from $75 billion last year. We’re also seeing some notable effects on inflation: Since early this year, core goods prices in the Consumer Price Index (CPI) have accelerated by more than 1.5 percentage points, with large increases in a range of imported goods.

We also expect significantly more inflation pass-through ahead. We estimate that to date, consumers have borne 30% to 40% of the cost of the tariffs, with the corporate sector absorbing the remainder. Firms aggressively accumulated inventory as part of the front-loading seen in the first half, giving themselves room to delay price increases. But that process is now likely playing through. We also hypothesize that firms have held off on price increases, awaiting visibility about where tariffs would ultimately land and harboring concerns about consumers’ willingness to absorb further price increases.

Over time, we anticipate firms will find ways to shift the costs of the tariffs onto consumers. As this occurs, U.S. consumers are likely to pull back on spending. The first-half front-loading was moving expenditure from the future into the present; it presumably must be “paid back.” In addition, as tariffs drive prices higher, real incomes will be reduced and real spending should decline.

Accordingly, we expect a softening of U.S. consumption and imports through the next couple of quarters, and note that recent U.S. labor-market weakening is broadly consistent with this view. In tandem, our forecast sees global growth slowing to below 2% in the second half of the year before bounding back to 2.5% next year. This tariff-related divot in global economy activity, while notable, is now smaller and more short-lived than we’d feared as 2025 began.

U.S. tariffs are at their highest levels in decades, and we remain on a steep learning curve about the implications for economic performance. A major surprise is that the process of pass-through into price, and the accompanying restraint on spending, has been more prolonged than we’d expected — which, in turn, has provided a buffer for the effects on the economy. 

Part of this slower pass-through reflects that tariffs have come online gradually, with more likely ahead. But it also reflects the many ways the economy can adapt to tariffs. Besides raising prices, firms can reduce their margins, adjust production plans, cut costs (including wages and employment) and deploy inventories. Similarly, households can shift the timing of purchases, rotate spending to other goods and services, and adjust savings. Another surprise is that to date, foreign exporters have absorbed only a negligible share of the tariffs. We continue to expect firms will price for concessions from their foreign suppliers, but even so, the share of the tariffs paid by foreign exporters is likely to be relatively small, perhaps in the neighborhood of 10%.