The world seems a pretty volatile place right now. Over the past few months the vagaries of American trade policy have threatened to upend the global economy. The ebb and flow of tensions in the Middle East has only added to the prevailing sense of uncertainty.
Against this backdrop, the International Monetary Fund — along with central banks like the Bank of England — has stressed how recent developments are greatly clouding the economic outlook. Uncertainty has remained high, in the IMF’s view, even as effective US tariff rates have come down from the levels announced in early April.
This matters. One of the main ways in which higher tariffs affect the global economy in the near term is through their impact on perceptions of uncertainty. Delays to investment plans, or the cancellation of major projects, are an inevitable consequence of a less certain outlook.
As a result, there’s widespread agreement among economists that in the near term a significant global slowdown is on the cards. The latest Oxford Economics forecast, for example, estimates a fall in the annual pace of world GDP growth to around 2 per cent by the end of 2025, a full percentage point weaker than at the start of the year.
The key question is what happens next. While policymakers continue to argue that a high level of uncertainty is weighing on economic activity, recent evidence has been more positive and raises the prospect of only a short-lived downturn.
Take newspaper coverage. The topics “trade policy” and “uncertainty” appeared together far more frequently in articles following the “liberation day” tariff announcements. Much of April’s dramatic increase has since dissipated, however.
A more direct gauge of the uncertainty affecting investment and job hiring decisions is to ask businesses themselves. In the aftermath of the initial US tariff announcements, respondents to the regular Global Risk Survey from Oxford Economics judged that uncertainty about the outlook had risen markedly. This was accompanied by a perception that economic growth in the year ahead was likely to be significantly weaker than previously anticipated.
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It was clear that many businesses were in wait-and-see mode. While a majority of those canvassed at the time reported that US trade policy had caused them to delay or postpone investment plans, there hadn’t been significant cancellations of planned investment.
Business perceptions of economic uncertainty have since eased considerably. According to preliminary results from September’s Global Risk Survey, businesses judge that the risk of global recession has halved since the time of the initial US tariff announcements, falling back sharply from their earlier 1-in-4 estimate.
Central bank surveys have been telling a similar story. Businesses in Britain and the US perceive fairly normal levels of uncertainty over prospects for sales growth. Those in the EU aren’t reporting major difficulties in making predictions about their future business or financial situation either. Based on these indicators, uncertainty currently appears far more muted than at the height of the pandemic and after Russia’s invasion of Ukraine.
Businesses appear to have taken comfort from signs of a more pragmatic US trade policy than initially feared. The tariff pauses that quickly followed “liberation day” appear to have convinced many that future US trade policy will be at least partially responsive to the macroeconomic and financial market backdrop.
The behaviour of other governments is also likely to have played a role in assuaging business fears. In particular, retaliation to US tariff increases has been far more limited than many anticipated, reducing the risk of a succession of tit-for-tat escalatory tariffs around the world.
The lack of retaliation has eased concerns that the global economy might lurch into a period of stagflation, of the kind seen in the 1970s. Widespread retaliation would have represented a major supply shock to economies outside the US. This would have created a major challenge for central banks, conscious of faltering growth but mindful of rising price pressures.
Instead, with the temptation to retaliate through significantly increased tariffs on US imports largely resisted, the shock facing these economies is primarily one of weak demand as exports to the US dry up. Central banks outside the US can in principle keep policy rates lower than would otherwise be the case, supporting growth while at the same time keeping a lid on inflation.
It appears that both factors — a more pragmatic US approach to trade policy and a lack of retaliation from trading partners — have capped perceptions of the potential fallout from higher tariffs. Indeed, the proportion of Global Risk Survey respondents citing a trade war as a very significant risk to the world economy has now dropped by around a third since April.
The turnaround shouldn’t be exaggerated. Even before April’s tariff drama, policy uncertainty had risen following last year’s US elections. Tariff risks are still an impediment to business investment, despite the shift in perceptions of recent months. Higher tariffs also have longer-term consequences, over and above the effect of uncertainty on economic activity.
However, there are grounds for cautious optimism. It does seem increasingly likely that, at the global level, the impact of US trade policy will be fairly contained. In the US, meanwhile, the AI investment boom is expected to continue, at the same time as incentives in President Trump’s One Big Beautiful Bill Act are set to support businesses’ capital expenditure more broadly. The upshot is that economic weakness in the latter half of this year should make way for stronger growth in 2026.
There is even the possibility of a more robust global rebound should the risks around US trade policy continue to abate. One plausible scenario is for tariff uncertainty to decline further in the coming months, returning to the lower level seen in Trump’s first term. Based on our latest modelling, the pace of expansion would rebound as a result, with world GDP growth back above 3 per cent as soon as the middle of next year.
After the volatility of recent months, this would represent quite an achievement for the global economy.
Jamie Thompson is Head of Macro Scenarios at Oxford Economics