Tariff wars, rising US debt, and policy fluctuations are weighing on global expansion — even as investment in artificial intelligence fosters some resilience.
This has been a turbulent year, marked by uncertainty about global economic policies. US tariffs remain undefined in terms of form and scope, which exacerbates instability. Global growth is expected to decline in the final months of this year and into 2026. The US economy, aided largely by massive investments in artificial intelligence, is likely to continue to outperform Europe, while China is still expected to outperform both, although slowing. Economists expect growth to moderate, but few expect a sharp decline, even in light of the major shift in trade policy the United States is witnessing.
“The unprecedented uncertainty best captures the moment.”
Drew DeLonge,Kearney
“The global economy will grow below its potential this year and next,” said Elena Duggar, executive director at Moody’s Macroeconomic Council. “In early 2025, initially driven activity — such as stockpiling ahead of new tariffs — pushed the numbers higher, so they looked good in the middle of the year. But we expect the global economy to slow in the second half of 2025.”
Growth in the United States is expected to slow to 1.5% in 2025, and remain weak in 2026, according to Duggar, despite significant investments in artificial intelligence. The euro area is expected to expand by 1.1% this year, a slight increase from 2024, and to increase by 1.4% in 2026. China’s growth is expected to slow somewhat this year to 4.7% compared to 2024, then decline to 4% in 2026.
“Why this slowdown? It’s mainly because the business activity that was initially put in place has faded, policy uncertainty remains very high compared to historical norms – hampering investment decisions – and tariffs are starting to come in, impacting consumer spending and corporate profit margins,” Duggar says.
Expanding tariffs shakes trade
Trade tariffs are not a new tool in Washington’s policy arsenal. The first Trump administration reintroduced it as a central economic lever, and while the Biden administration has toned down its rhetoric, it has kept many of those measures in place and even expanded them in certain sectors such as automobiles.
What has changed this year is not the existence of tariffs, but their size and extent. The United States, which has been the standard bearer of open markets and the promotion of global trade for more than eight decades, has taken a dramatic turn. The latest tariff package represents a sweeping departure from its traditional role, with a radical shift in strategy that could reshape the global economic system.
The Budget Lab at the nonpartisan Center for Policy Research at Yale University estimates that tariffs average about 18%, compared to just 2.7% last year. But it doesn’t look like that’s where they’ll settle.
“I don’t have anything against tariffs per se,” says David Andolfato, a former St. Louis Federal Reserve Bank researcher who became chair of the economics department at the University of Miami’s Herbert School of Business in 2022. “It’s just another tax, especially when the tariffs are designed to boost certain sectors of strategic interest.”
“My feeling from the beginning was that these tariffs were not a big problem because the United States has a large, diversified economy,” Andolvato says. “If the tariffs are negotiated and put into place, everyone understands the rules of the game. But the uncertainty is so vast and great that I think it can’t be good.” Global Finance.
A wave of contradictory announcements, often based on executive orders, with differing views and stop-and-go decisions, has defined the tariff announcements since April. Some of this was based on President Trump’s various announcements, some on ongoing bilateral deals, and some on court decisions on these actions.
At the end of August, a federal appeals court upheld an earlier ruling that the administration’s reliance on the International Emergency Economic Powers Act (IEEPA) — a legal tool widely used to justify broad tariffs — was invalid. The decision strikes at the heart of Trump’s trade strategy. Unless the Supreme Court overturns the ruling, the president may have to seek approval from Congress to keep his broad tariffs in place — measures that critics say are essentially new taxes that only lawmakers have the authority to impose.
Definitions are here to stay
Uncertainties related to tariffs greatly influence investment decisions, including those of companies considering manufacturing in the United States to avoid tariffs. “It’s a very difficult time to be an executive trying to make decisions, and I feel like it’s a very cliche, but unprecedented uncertainty best captures this moment,” says Drew DeLong, principal of Dallas-based Kearney Consulting.
However, DeLong adds, regardless of the final form of tariffs, the tariff approach to international trade is here to stay. It is likely to have a lasting impact, as it remains unclear what other major countries might do – emulate the United States or create a trade network that isolates the United States.
“Even if these definitions are modified, and even if the courts, all the way up to the Supreme Court, block some of them, we are facing a changing environment,” DeLong says. “And since the Biden administration did not abandon the definitions that the first Trump presidency introduced, a different president in 2028 will not abandon the tariffs. I think the tariffs are likely to remain in place for a while.”
In the near term, the impact of tariffs is expected to be mostly felt by US consumers.
“Who pays for these tariffs? American consumers, for the most part. That’s exactly what we saw in 2018 and 2019 with the first round of tariffs. Almost all of the cost was borne domestically. So yes, American consumers will feel it in rising prices. But you’ll also see a decline in trade volume, which hurts both sides,” Moody’s-Duggar says, adding that its traditional counterpart China, along with other countries, It will also be affected by increased tariffs.
If tariffs and economic uncertainty are weighing on the US economy, their effects are also felt globally through spillover effects. However, most countries are seeing their economic growth slow.
“Tariffs are clearly an important influencing factor,” says Adam Slater, chief economist at Oxford Economics in London, “and they work mostly through slowing growth in the US, which then obviously spills over into slowing growth elsewhere as well, especially countries that have close trade links with the US, like Mexico and Canada in particular.”
According to Slater, China is the country expected to see the biggest slowdown in 2025, and “here too you can see the impact of tariffs, among other factors, such as weak domestic demand and ongoing real estate sector problems.”
Two other major countries significantly affected by tariffs are India and Brazil, although in each case the effects move in opposite directions. “For India, we don’t see much change, with growth at 6.5% this year and 6.6% next year,” says Slater. “For Brazil, we expect a sharper slowdown – 2.3% this year and 1.4% next year – but this is less about tariffs and more about tight monetary policy.”
Positive surprises could come from Europe, at least according to some.
“Europe will probably grow a little faster next year, partly because the uncertainty caused by the tariffs has eroded somewhat, and then we have the fiscal support coming from Germany, which should have a bigger impact sometime next year,” says Alejandra Grindal, chief economist at Ned Davis Research.
If tariffs and uncertainty negatively affect economic growth, two other factors support expansion. First, fiscal policies in the United States, Germany, and China were expansionary. The Big Beautiful Bill, which the US Congress passed in May, thanks to an extension of the tax cuts, is expansionary, as the Congressional Budget Office noted in August.
At the same time, the huge level of investment by US companies in AI is supporting US GDP growth. According to investment bank UBS, spending on artificial intelligence is expected to reach $375 billion this year and $500 billion in 2026.
According to Ricardo Reis, professor of economics at the London School of Economics, the economic outlook is a mixed bag. Growth in the US has been largely supported by the record level of AI investments and renewed fiscal stimulus, while tariffs are having a negative impact, he said.
“In Europe, growth is hampered by a prolonged recession, limited adoption of AI investments compared to the US, negative shocks from US trade policy, and the ongoing fallout from the Russian war,” says Reiss. “The outlook looks bleak compared to other regions.” “For emerging markets, the picture is more complex: uncertainty about tariffs reduces productivity across the board, but in the short term, it also shifts where production occurs domestically. The erratic nature of tariff policy makes it difficult to measure these effects… (but) on average, trade wars make everyone worse off.”
Confidence in the Fed has been shaken
Tariffs create uncertainty in the short term, but deeper questions cloud the long-term outlook. Three issues stand out here: Will the Fed remain independent under pressure from Trump, and how will this shape market views on inflation, the dollar, and US Treasuries? How will Washington deal with its increasing public debt? Will AI deliver the productivity gains that many hope it will achieve, or will it not deliver?
Economists agree that central bank independence is critical to protecting the stability of the US dollar and the creditworthiness of US Treasuries – two pillars of global financial markets.
Most economists agree that the appointment of Jerome Powell’s successor as Chairman of the Federal Reserve starting in May 2026 will be important, and most of them prefer current Board member Christopher Waller. What the markets don’t want is “yeah man.” They prefer to have an independent thinker.
“Christopher Waller should be one of the top choices for federal governor next year,” says Alejandra Grainger, chief economist at Ned Davis Research in Florida. “He’s more dovish, but he gives good reasons for that. He’s saying, ‘I’m not doing this because of Trump.’ He’s predicted greater weakness in the labor market, and he really believes the tariff hike will be just fleeting.”
The looming debt burden in the United States
The high and increasing level of US debt is another important factor for future growth, and not just in the United States, because it is the reason behind high inflation rates and high interest rates.
In May, Moody’s downgraded US long-term unsecured bond ratings to Aa1 from Aaa, following similar downgrades from Standard & Poor’s in 2011 and Fitch in 2023, marking the first time the three companies have rated the US below the top level.
Many administrations have failed to correct the trend of rising US debt, and the outlook is alarming. “The federal deficit rises from 6.4% of GDP in 2024 to nearly 9% by 2035. Debt to GDP rises from 98% in 2024 to 134% in 2035. Federal interest payments are expected to rise from 18% of revenue in 2024 to 30% by 2035. This means that within 10 years Only about a third of the federal budget could go to interest payments alone, Moody’s Duggar says.
The main problem here is that future long-term inflation looks like the only way out.
“I think the growing debt in the United States is very concerning, and it’s one of the main reasons, not the only reason, but it’s one of the main reasons why I expect the next five years to be a period of high inflation in the United States,” Reiss says.
The most likely effect is that bondholders are more likely to be the ones bearing the payments, due to the absence of political will to raise taxes or cut interest.
Wildcard for AI
Moody’s Duggar warns that a potential risk for the US is the impact of increased use of artificial intelligence in the labor market, which has already shown signs of weakness in the summer, along with huge downward revisions to previous jobs reports. More companies are announcing the adoption of AI technology across industries, raising the possibility of real-world consequences for the workforce. An MIT study published in July showed that 95% of 300 organizations found that investing in GenAI resulted in a zero return, despite the organization investing between $30 billion and $40 billion.
However, most economists believe that a positive long-term surprise could arise from a sharp increase in productivity, leading to tangible benefits of economic expansion.
“AI is just more potential productivity growth,” says Andolvato of the University of Miami. “I would never bet against the American economy. It has always been an economy where entrepreneurship is alive and well. They always achieve cost reductions, better ways of doing business.”
