US growth forecast cut as trade war hits economy; inflation up: Fitch

Additionally, Fitch expects world growth to slow to 2.3 per cent this year, well below trend and down from 2.9 per cent in 2024. This is a downward revision of 0.3 percentage points (pp) and reflects broad-based reductions in developed and emerging economies. Growth will remain weak at 2.2 per cent in 2026, as per the Global Economic Outlook (GEO) – March 2025 by Fitch Ratings.

Fiscal easing in China and Germany is expected to mitigate the impact of higher US import tariffs, but eurozone growth this year remains considerably weaker than projected in the December GEO. Given their significant trade exposure to the US, Mexico and Canada are set to enter technical recessions, leading to downward revisions of their 2025 growth forecasts by 1.1 pp and 0.7 pp, respectively.

The scale, speed, and scope of US tariff increases since January have been unprecedented. The US Effective Tariff Rate (ETR) has already surged from 2.3 per cent in 2024 to 8.5 per cent and is expected to rise further.

The forecast also indicates a 15 per cent ETR on Europe, Canada, Mexico, and others in 2025, with a 35 per cent rate on China, pushing the overall US ETR to 18 per cent this year before easing to 16 per cent in 2026 as tariffs on Canada and Mexico drop to 10 per cent. This would mark the highest US tariff rate in 90 years.

There is huge uncertainty about how far the US will go and Fitch’s assumptions could be too harsh. But there are also risks of a larger tariff shock including from an escalating global trade war. Moreover, the US administration has set out an import substitution agenda—aimed at boosting US manufacturing and reducing the trade deficit—which it believes can be achieved with higher tariffs, Fitch said in a press release.

Tariff hikes will result in higher US consumer prices, reduce real wages, and increase companies’ costs, and the surge in policy uncertainty will take a toll on business investment. Retaliation will hit US exporters. Export-oriented global manufacturers in East Asia and Europe also will be affected. Modelling suggests tariff increases will reduce GDP by about 1 pp in the US, China, and Europe by 2026.

Germany’s recent pivot to fiscal stimulus will do a lot to cushion the blow and will allow its economy to recover modestly in 2026. More aggressive policy easing will also help to offset the impact in China, added the release.

With the tariff shock expected to add 1 percentage point to near-term US inflation, Fitch believes that the Fed is likely to delay further easing until the fourth quarter of 2025. Only one rate cut is now anticipated this year, followed by three more in 2026 as the economy slows and tariff levels stabilise.

ALCHEMPro News Desk (SG)