In -depth cuts for estimated growth during the global trade war increased
Fitch ranking has sharply reduced its estimates for world growth in responding to severe escalations in the global trade war. In a special update for the global economic prospects for its quarterly, Fitch cut world growth in 2025 with 0.4PP and the growth of China and the US with 0.5PP from the March edition.
US annual growth in 2025 is expected to remain positive at 1.2% but will slow down to crawling throughout the year to only 0.4% yoy at 4Q25. China’s growth is expected to drop below 4% this year and the next while the growth of the Euro zone will remain jammed below 1%. World growth is projected to fall under 2% this year, which will be the weakest since 2009 not including Pandemic.
The increase in the tariff for the ‘day of release’ of the US is far worse than expected. While then stopped and replaced with a 10% universal level for 90 days, shocks pushed several rounds of retaliation movements between China and the US, taking bilateral rates of more than 100%. The average effective tariff rate (ETR) has risen to 23%, the highest since 1909 and far above 18% that we assumed in March. It is difficult to predict US trade policy with any trust, but we now consider the US ETR in China to remain above 100% for some time, before returning to 60% next year. At this stage we remain assuming our 15% US ETR to other trading partners, in line with the assumptions in the March Geo.
Escalation tariffs will hit the flow of US-China trade dramatically. With a limited scope for the substitution of imports or transfer of trade in the near future, adverse supply shocks in the US can be marked. Our US inflation forecast has been revised up to more than 4%, implies stagnation with real wages. The uncertainty of large policies -the magnitude of hurting the prospects of business investment, decreasing equity prices reduce household wealth and US exporters will be hit by retaliation.
The Chinese economy has grown faster than expected over the past year, but clean trade has contributed one third of GDP growth. This will slow down because the exporter struggles to direct sales in the near future. The decline in the construction of Chinese houses and deflation pressure continues, but we hope that the easing of fiscal and monetary policies will be improved. We also hope that some additional US tariff revenues will be recycled back to the US economy for the next 18 months, including through tax cuts. But because the two largest economies in the world are slow, abundance will feel far and spacious, and this is reflected in the revision of an extensive downward estimate.
Fitch still expects the federal reserve to wait until 4Q25 before cutting the level even though the prospect of US growth worsens. Import prices are determined to rise sharply and there is a worrying leap in expectations of US household medium -term inflation for the past two months. However, the surprising weakening of the US dollar has created more space for other central banks to facilitate and we now expect to cut interest rates deeper than ECB and in the developing country. Lower Commodity Prices – We have reduced our Brent 2025 oil price assumption by USD5 to USD65 – will also facilitate the speed of monetary loosening that is faster outside the US due to slowing growth.
Source: Fitch ranking
