The uncertainty surrounding US trade policy is weighing down global growth prospects, KPMG warns.
The global economy is currently experiencing a “geopolitical-driven slowdown” despite the recent de-escalation in trade tensions, according to KPMG’s latest quarterly economic outlook.
The outlook warned that the global economy had arrived at a key juncture, with the outcome critically dependent on the pathway of ongoing trade negotiations.
KPMG said that following a period of stabilisation, the global economy appeared as though it would continue its gradual recovery in 2025.
However, this reprieve looks to be short-lived, with significant uncertainty surrounding US trade policy weighing down global growth prospects.
“Although the eventual position of the Trump administration is not yet fully established, a new set of challenges has emerged during the past couple of months,” KPMG said.
Even without the substantial disruptions to international trade norms following the announcement of US tariffs, KPMG said the global economic performance was not expected to reach the pre-pandemic trend due to weakened supply chains and geopolitical tensions, such as the continuing war in Ukraine.
“Additionally, advanced economies face structural obstacles like ageing populations, sluggish investment and persistent low productivity growth, limiting their ability to return to previous long-term growth,” the outlook said.
These trade headwinds have only further complicated the global policy environment, with forecasts for global growth being revised downwards.
“Global disinflation progress has stalled or even reversed in some countries, further complicating the balancing act which must be achieved by policymakers,” KPMG said.
“Although continuing to ease, services inflation remains at elevated levels, while goods inflation has seen a recent uptick. Some nations may require a further easing of monetary policy settings to support growth, in this context of weakening growth prospects.”
Fiscal policy is also likely to reignite ongoing dilemmas, it said, which will place pressure on existing fragilities within government balance sheets.
“This reversal of globalism may require short-term uplifts in fiscal support to support growth, alongside long-term commitments to increased defence spending,” KPMG said.
“At the same time, government budgets are under pressure, with rising debt to GDP ratios elevating discussions about the sustainability of national debt.”
KPMG noted that this has been reflected in long-term bond yields, driven by concerns surrounding trade policy, future inflation, and growth prospects, as well as debt management.
“This will only further raise finance costs and interest repayments,” it said.
Despite these gloomy developments, KPMG said it was important to note that a variety of pathways is possible.
“On the upside, if ongoing dialogue can successfully ease tensions, the disruption to global trade links could be far less than what is implied by the recently announced reciprocal tariffs and retaliatory measures,” it said.
“The announcement of a 90-day pause to most US tariffs as well as a mutual de-escalation in retaliatory tariffs with China have been welcome developments, which signal that a less disruptive outcome can be achieved.”
