Global Economic Outlook: Tariffs, AI, and Lingering Uncertainty

Turbulence and Economic Outlook Amidst Policy Shifts

The global economic landscape has endured a turbulent year, primarily characterized by profound uncertainty surrounding international economic policies. The precise form and scope of US tariffs remain undefined, creating a climate of instability that permeates global markets. Projections indicate a moderation in global economic growth during the concluding months of the current year and extending into 2026. Despite this general easing, the US economy is anticipated to continue its outperformance relative to Europe, significantly bolstered by substantial investments in artificial intelligence (AI). China, while experiencing a slowdown, is still expected to maintain a growth rate surpassing both the US and European counterparts. Economists largely foresee a period of moderating growth rather than a precipitous downturn, even in the wake of the United States’ notable shift in trade policy.

As Drew DeLong, a Principal at Kearney, succinctly puts it, "Unprecedented uncertainty is what best captures the moment." This sentiment encapsulates the prevailing challenge for businesses and policymakers worldwide.

Elena Duggar, Managing Director at Moody’s Macroeconomic Board, elaborated on the current scenario, stating, "The global economy is going to grow below potential this year and next. In early 2025, front-loaded activity—like stockpiling ahead of new tariffs—pushed the numbers up, so they looked good midyear. But we expect the global economy to slow in the second half of 2025."

Specific growth forecasts highlight this trend: the US economy is projected to slow to 1.5% in 2025 and maintain a subdued pace into 2026, even with considerable AI investments. The euro area is expected to see a modest expansion of 1.1% this year, a slight improvement over 2024, before increasing to 1.4% in 2026. China's growth, while still robust compared to other regions, is forecasted to decelerate to 4.7% in 2025 and further to 4% in 2026.

Duggar attributes this anticipated slowdown to several critical factors: "Mainly because that frontloaded trade activity is fading, policy uncertainty remains very high compared with historical standards—holding back investment decisions—and tariffs are beginning to show up, weighing on consumer spending and company margins."

Tariffs: An Expanding Reach and Enduring Impact

Trade tariffs are not a novel instrument within Washington's policy toolkit. The first Trump administration effectively reintroduced them as a central economic lever, and the subsequent Biden administration, though adopting a softer rhetoric, largely maintained these measures and even expanded them in strategic sectors like the automotive industry.

The notable change this year is not the mere existence of tariffs, but their dramatically increased scale and breadth. The United States, historically a steadfast proponent of open markets and global trade for over eight decades, has embarked on a significant deviation from this traditional stance. The latest package of tariffs represents a sweeping departure from its previous role, indicating a radical shift in strategy that holds the potential to fundamentally reshape the global economic order.

Yale’s Budget Lab, a nonpartisan policy research center, estimates that average tariffs have now reached approximately 18%, a substantial increase from just 2.7% last year. Furthermore, there is an underlying expectation that these figures may not represent the final equilibrium.

David Andolfatto, formerly a researcher at the St. Louis Fed and now Chair of the Economics Department at the University of Miami’s Herbert Business School, commented on the situation: "I have nothing against tariffs per se. They’re just another tax, and especially when tariffs are designed to promote certain sectors of strategic interest." He added, "My feeling from the beginning was that these tariffs were not a big deal because the United States is such a large, diversified economy. If the tariffs were negotiated and put in place, everybody understood the rules of the game. But the uncertainty is so wide and large that I think it just cannot be good."

The period since April has been defined by a flurry of contradictory announcements regarding tariffs, often stemming from executive orders, diverse viewpoints, and inconsistent decisions. This erratic policy environment has been influenced by presidential statements, ongoing bilateral negotiations, and judicial rulings concerning these actions. A significant development occurred in late August when a federal appeals court affirmed an earlier ruling that the Administration's reliance on the International Emergency Economic Powers Act (IEEPA)—a legal framework frequently used to justify broad tariffs—was legally invalid. This decision directly challenges a core element of the prevailing trade strategy. Unless the Supreme Court overturns the ruling, the president may be compelled to seek congressional authorization to sustain these extensive tariffs—measures that critics contend are essentially new taxes, which only lawmakers have the authority to impose.

Tariffs: A Lingering Presence

The high degree of tariff uncertainty significantly impacts investment decisions, including those of companies contemplating manufacturing in the US to bypass these duties. Drew DeLong from Kearney aptly describes the current environment for executives: "It is a very difficult time to be an executive trying to make decisions, and I feel like it’s a very cliche phrase, but unprecedented uncertainty is what best captures the moment."

DeLong, however, emphasizes that regardless of the ultimate configuration tariffs assume, the fundamental tariff-centric approach to international trade is likely to persist. This approach is anticipated to have a lasting impact, particularly given the unresolved question of how other major global economies will respond—whether they will mirror the US strategy or establish a trade network that effectively isolates the United States.

He further elaborated, "Even if these tariffs are modified, even if the courts, up to the Supreme Court, will block some of them, we are facing a change of environment. As the Biden Administration did not abandon the tariffs introduced by the first Trump presidency, a different president in 2028 will not abandon tariffs. I think tariffs are likely to stay for a while."

In the immediate term, the most direct impact of tariffs is expected to be borne by US consumers. Moody’s Duggar explains, "Who’s paying for these tariffs? US consumers, for the most part. That’s exactly what we saw in 2018 and 2019 with the first round of tariffs. Almost all the cost was borne domestically. So yes, US consumers are going to feel it in higher prices. But you’ll also see trade volumes fall, which hurts both sides." She also noted that traditional trade partner China, alongside other nations, will also experience negative effects from the tariff increases.

Global Economic Ripples and Varied Impacts

While tariffs and economic uncertainty exert a noticeable drag on the US economy, their ramifications are also felt globally through significant spillover impacts. Most countries are experiencing a deceleration in their economic growth. Adam Slater, a lead economist at Oxford Economics in London, clarifies: "Tariffs are obviously an important impacting factor, and they operate mostly through slower growth in the US, which then obviously ripples out to slow growth in other places as well, particularly countries where there are tight trade links with the US, like Mexico and Canada in particular."

According to Slater, China is projected to experience the most significant slowdown in 2025, where "here too you can see the impact of tariffs, among other factors, such as a weak domestic demand and the ongoing property sector problems."

India and Brazil represent two other major economies notably affected by these trade policies, though their experiences differ. Slater indicates that "For India, we do not see much change, with growth at 6.5% this year and 6.6% next year. For Brazil, however, we anticipate a sharper slowdown—2.3% this year and 1.4% next year—but this is less about tariffs and more due to tight monetary policy."

Conversely, some analysts foresee positive surprises emerging from Europe. Alejandra Grindal, Chief Economist at Ned Davis Research, suggests: "Europe will probably grow a little faster next year, partly because the uncertainty from tariffs has been eroded somewhat, and then you have the fiscal support coming from Germany, which should have its larger impact sometime next year."

Countervailing Forces: Fiscal Policy and AI Investment

While tariffs and pervasive uncertainty are exerting negative pressure on economic growth, two other crucial factors are simultaneously bolstering expansion. Firstly, expansionary fiscal policies have been implemented in key economies, including the US, Germany, and China. In the US, the One Big Beautiful Bill Act, passed by Congress in May, is deemed expansionary due to its extension of tax cuts, as noted by the Congressional Budget Office (CBO) in August.

Concurrently, the prodigious level of investment by US companies into artificial intelligence is a significant driver of US GDP growth. UBS, a prominent investment bank, forecasts that AI spending is anticipated to reach $375 billion this year and a substantial $500 billion in 2026.

Ricardo Reis, a professor of economics at the London School of Economics, characterizes the overall economic outlook as a "mixed bag." He explains that US growth has been robustly sustained by record-breaking AI investments and renewed fiscal stimulus, despite the negative impact of tariffs. In contrast, "In Europe, growth is being held back by long-standing stagnation, a limited adoption of AI investments in comparison to the US, negative shocks from US trade policy, and the ongoing fallout from the Russia war. Prospects look dismal compared to other regions," Reis notes. For emerging markets, the situation is more intricate: "tariff uncertainty reduces productivity across the board, but in the short run, it is also shifting where production is localized. The erratic nature of tariff policy makes it difficult to measure these effects … [but] on average, trade wars make everyone worse off."

Navigating Long-Term Challenges: Fed, Debt, and AI

Beyond the immediate uncertainties created by tariffs, deeper questions cloud the longer-term economic outlook. Three paramount issues stand out: the sustained independence of the Federal Reserve under potential political pressure, particularly from figures like Donald Trump, and its subsequent influence on market perceptions of inflation, the US dollar, and US Treasuries; the strategy Washington will adopt to address its escalating public debt; and whether artificial intelligence will deliver the transformative productivity gains many anticipate or ultimately fall short of expectations.

Central Bank Independence Under Scrutiny

Economists widely concur that the independence of central banks is indispensable for safeguarding the stability of the US dollar and preserving the creditworthiness of US Treasuries—both foundational pillars of global financial markets. The appointment of Jerome Powell’s successor as chair of the Federal Reserve, effective May 2026, is considered highly significant, with many economists favoring current board member Christopher Waller. Markets prioritize an independent thinker over a "yes man."

Alejandra Gringer, Chief Economist at Ned Davis Research in Florida, notes, "Christopher Waller is supposedly one of the top choices for federal governor next year. He is more on the dovish side, but he gives good reasons for it. He’s saying, Hey, I’m not doing it because of Trump. He did anticipate a bigger weakness in the labor market, and he truly believes that the spike from tariffs will just be transitory."

The Looming Specter of US Debt

The persistently high and growing level of US public debt represents another critical factor impacting future growth, not only domestically but globally, as it is a significant contributor to higher inflation and increased interest rates. In May, Moody’s Ratings downgraded the US’ long-term issuer and senior unsecured ratings to Aa1 from Aaa. This followed similar downgrades from Standard and Poor’s in 2011 and Fitch in 2023, marking the first time all three major rating agencies have placed the US below their top-tier rating.

Multiple administrations have failed to correct the upward trajectory of US debt, and current forecasts present a worrying picture. Moody’s Duggar warns, "The federal deficit goes from 6.4% of GDP in 2024 to nearly 9% by 2035. Debt-to-GDP rises from 98% in 2024 to 134% in 2035. And federal interest payments are expected to rise from 18% of revenues in 2024 to 30% by 2035. That means in just 10 years, almost a third of the federal budget could go to interest payments alone."

The primary implication is that future long-term inflation appears to be the most probable, albeit undesirable, resolution. Ricardo Reis states, "I think that the growing debt in the US is very worrying, and is one of the main reasons, not the only one, but one of the main reasons why I expect the next five years to be a period of high inflation in the US." The most likely outcome is that bondholders will ultimately bear the financial burden, largely due to a perceived lack of political will to enact substantial tax increases or benefit reductions.

The AI Wildcard: Promise and Peril

Moody’s Duggar highlights a potential risk for the US economy stemming from the increasing adoption of artificial intelligence on the job market, which has already exhibited signs of weakness, particularly evident in downward revisions of prior job reports during the summer. A growing number of companies across various industries are announcing their integration of AI technology, raising concerns about its potential consequences for the workforce. A study published by MIT in July revealed that 95% of 300 surveyed organizations found that their GenAI investments yielded zero return, despite enterprise investments ranging from $30 billion to $40 billion.

However, the predominant view among economists is that AI holds the potential for a significant long-term positive surprise through a sharp increase in productivity, which could generate tangible benefits for overall economic expansion. Miami University’s Andolfatto expresses optimism: "AI is just more potential productivity growth. I would never bet against the US economy. It’s always been one where the entrepreneurial spirit is alive and well. They are always delivering cost cuts, better ways of doing business." This duality—potential job displacement versus unprecedented productivity gains—positions AI as a critical wildcard in the future economic narrative.