Double Whammy: Geo-Politics And Tariff War To Dent Global Economy This Year, But A Recession Is Unlikely

The world economy is battered by the ongoing geo-political crisis between powerful countries and the trade war between the United States and China is risking stagflation and while these factors weigh heavily on the global growth outlook for this year, a full fledged recession is unlikely, according to experts around the globe.

A trade conflict initiated by the U.S. President Donald Trump's chaotic tariff policy pushed duties on Chinese goods as high as 145% before it was lowered and that prompted U.S. importers to convert warehouses into facilities that are exempt from tariffs until they are ready to sell the merchandise.

Once tariffs hit the shelves, U.S. retailers would feel the heat depending on the kind of exposure they have with China and it would finally trickle down to the consumers who would now pay a tariff-inflected higher price for goods.

That, along with Russia-Ukraine, Israel-Palestine and now India-Pakistan conflict account for some serious trouble for the global economy and while financial markets are on the edge with investors bracing themselves for a possible disaster, experts think otherwise.

"We expect the world economy to grow a touch slower in the next couple of years than it did in 2024," said Jennifer McKeown, chief global economist at Capital Economist.

"The trade war should not significantly dent global trade, but this view is predicated on countries refraining from escalatory rounds of retaliation to U.S. tariff hikes. Global average inflation should flatline this year, so the scale of rate cuts will be smaller this year than last."

The International Monetary Fund's April projections showed the global economy was now expected to grow 2.8% in 2025 and 3.0% in 2026, much lower than 3.3% in 2025 and 3.3% in 2026 predicted in January. Despite the predicted slowdown, the IMF didn't forecast a recession.

Dark Days Ahead For Advanced Economies

The U.S. economic outlook has worsened driven by tit for tat trade policies. The leading Economic Index - an assortment of economic indicators - fell by 1.0% to 99.4 in April and recorded a steep decline since March 2023. Consumer sentiment has also taken a hit due to the ongoing trade crisis.

Still, a temporary tariff truce between the U.S. and China led to many brokerages scale back their recession forecast for the world's largest economy.

"Higher tariffs are set to weigh on growth and raise inflation, but are less likely to trigger a recession than feared last month. Tariffs do seem to have shifted economic growth into a lower gear, though," said Bill Adams, chief economist at Comerica Bank.

"Economic growth will get another shot in the arm in 2026 as the 2025 reconciliation bill ("Big Beautiful Bill") cuts taxes and widens the fiscal deficit. Moody's downgraded the U.S. sovereign credit rating on May 16 in reaction to a decade of big deficits that look set to continue for years to come."

The Euro Area and United Kingdom economies are predicted to grow moderately amid global trade uncertainty.

BNP Paribas wrote in their latest research note that margins for (Euro Area) growth will be limited in the short term by the trade conflict with the United States, persistent difficulties in industry, underlined by the still low, albeit slightly better levels of PMIs, and uncertainty about the Chinese economy.

China, on the other hand, lowered its benchmark lending rates on Tuesday for the first time since October to mitigate the economic effects of the Sino-U.S. trade war. This move is part of a broader effort by Chinese authorities to relax monetary policy and provide a cushion to the economy during these turbulent times.

The decision to lower interest rates comes as China seeks ways to support its economy, which has been adversely affected by ongoing trade tensions with the U.S. By reducing the cost of borrowing, the government aims to stimulate economic growth and alleviate some of the pressures businesses and consumers face due to the trade conflict.

India Shines All The Way Despite Trade Trouble

Despite the looming threat of tariffs and global trade disruptions, India's economy is poised to maintain its growth trajectory, buoyed by its significant domestic market and minimal reliance on exports.

That was evident after Moody's Ratings report suggested that the fastest growing economy's robust internal dynamics and strategic government initiatives aimed at enhancing consumption, manufacturing, and infrastructure development would likely compensate for any potential downturn in global demand. That was further supported by the anticipation of easing inflation, which may lead to cuts in interest rates, thereby bolstering economic growth.

The recent Moody's report underscores India's advantageous position in comparison to other emerging markets, primarily due to its strong domestic growth drivers and limited dependence on goods exports. This unique position strengthens India's capability to weather external economic shocks, including those from U.S. tariffs and broader trade disruptions. Also, the Indian banking sector's liquidity assures continued lending, supporting the overall economic momentum.

"The tax exemptions announced in the Budget will increase consumer spending and may boost GDP by 0.6% to 0.7%. However, uncertainty around the tariff rates imposed by the United States on Indian exports could offset those gains by 0.1% to 0.3%. Deloitte's (India) outlook remains optimistic, but cautious," Dr. Rumki Majumdar, economist at Deloitte India wrote in a research note.