Global Economic Outlook: May 2025 Insights and Future Risks

Introduction: A Global Economic Landscape in Transition

As of May 2025, the global economy continues to undergo significant transformations, with trade-related uncertainties diminishing but not disappearing entirely.

The recent reversal of U.S. tariffs, followed by a substantial bilateral agreement with China to reduce tariffs, has produced immediate positive effects across financial and commodity markets. Equity indices, crude oil prices, and the U.S. dollar all rebounded on the news.

Despite these short-term gains, structural challenges and uncertainties persist, raising concerns about the sustainability of global economic growth.

This detailed analysis explores the key factors shaping the global economic outlook, with a focus on recent policy decisions, inflationary dynamics, and growth projections for the upcoming years.

Trade Agreements: Tariff Reversal and Immediate Market Reactions

The long-standing trade tensions between the United States and China experienced a pivotal shift in April and May 2025. The U.S. decision to roll back significant tariffs, paired with the comprehensive agreement with China, ignited a wave of optimism across global markets.

• Immediate Impacts:

  • A surge in global stock market valuations.

  • Recovery of crude oil prices.

  • Strengthening of the U.S. dollar.

However, these positive effects should not be interpreted as a definitive resolution of underlying risks. Sector-specific tariffs remain in place, and the effective U.S. tariff rate continues to exceed its pre-election levels.

Furthermore, market confidence has been deeply shaken by the volatility and unpredictability of U.S. trade policies — a factor likely to influence economic decisions and international investments in the foreseeable future.

Persistent Trade Uncertainties

Although the agreement between the world’s two largest economies has been celebrated, experts warn that a re-escalation of trade tensions cannot be ruled out.

• Risk Factors:

  • Sectoral agreements were excluded from the latest negotiations.

  • Ongoing investigations could result in new tariff hikes on key products.

  • Confidence in the stability of U.S. trade commitments remains fragile, potentially deterring long-term investments.

In summary, while the tariff relief marks a significant breakthrough, the inherently uncertain and volatile nature of trade policy continues to cast a shadow over the global economic environment.

Global Growth Projections: Stable but with Elevated Risks

In light of the unexpected and broader U.S.-China trade agreement, S&P Global analysts have moderately adjusted their expectations.

While the baseline scenario for global growth remains stable, with projected real GDP expansions of 2.2% in 2025 and 2.4% in 2026, an upside risk to these forecasts has been identified.

• China:
  Growth projections have been slightly revised upward, supported by stronger-than-anticipated economic performance earlier this year and the implementation of more substantial policy stimulus.

• Other Economies:
  For most of the world’s major economies, projections remained relatively stable, with only minor short-term adjustments.

This stability follows several months of downward revisions, reflecting the recent slowdown in economic activity and lingering trade-related uncertainties.

Decelerating Growth: Persistent Signs of Weakness

Despite the optimism sparked by tariff reductions, leading economic indicators continue to signal concerns.

• Global Purchasing Managers’ Index (PMI):

  • The global composite output index declined to 50.8 in April, marking the third decrease in four months.

  • This result indicates global real GDP growth below potential.

• Business Expectations:

  • Business confidence deteriorated, reflecting uncertainties about the future of economic activity.

  • Current surveys have yet to fully capture the potential positive impacts of the recent trade agreement, suggesting that sentiment could improve in subsequent months.

Inflation Dynamics: Services Slowing Down, Goods Under Moderate Pressure

While much recent debate has centered on the tariff effects on goods prices, a more significant trend has emerged in services inflation, which has shown a notable deceleration.

• Services Inflation:

  • The monthly services consumer price inflation for the Group of Five (G5) economies fell by 0.5 percentage points between February and March, reaching 3.5% — the lowest rate since February 2022.

  • This represents a decrease of nearly 3 percentage points from the pandemic-driven peak recorded in February 2023.

• Goods Inflation:

  • Core goods inflation exhibited a gradual upward trend, climbing to 0.6% — the highest level in one year.

  • Data from S&P Global continues to indicate that this moderate upward pressure on goods inflation will likely persist.

U.S. Inflation: Temporary Relief from Tariff Pressures

April’s U.S. consumer price data revealed minimal direct impact from tariffs.

• Possible Explanations:

  • Companies may be drawing down inventories acquired before tariffs took effect, keeping prices temporarily stable.

  • Alternatively, firms may be temporarily reducing profit margins to absorb additional costs.

Both scenarios suggest that the current relief may be short-lived, with tariff-induced inflationary pressures potentially reemerging in the coming months.

• Services Inflation:

  • Core services inflation in the U.S. declined to 3.6% in April, the lowest level since November 2021.

  • By comparison, this rate stood at 5.3% in April of the previous year, reflecting a significant cooling trend.

Consequently, consumer price inflation forecasts for several economies have been slightly lowered in the May update, partly due to assumptions of more moderate commodity price trends.

Currency Movements and Monetary Conditions: Toward More Accommodative Policies

Another factor positively influencing global economic conditions is the recent depreciation of the U.S. dollar.

• Dollar Depreciation:

  • Between mid-January and early May 2025, the U.S. Federal Reserve’s trade-weighted nominal effective dollar index declined by approximately 6%.

  • Against the currencies of advanced economies, the depreciation was even steeper, nearing 10%.

This depreciation opens the door for central banks outside the U.S. to consider earlier interest rate cuts, fostering more accommodative monetary conditions globally.

• Potential Risk:

  • A sustained rebound in the U.S. dollar — though not the baseline scenario — could reduce the scope for monetary easing, with significant implications for global growth.

Final Considerations: A Delicate Balance Between Optimism and Caution

In summary, the global economic outlook as of May 2025 presents a mix of positive signals and persistent challenges.

• The reduction of tariffs between the United States and China has injected renewed optimism into markets, yet uncertainties about the stability and durability of these agreements continue to fuel concerns.

• Global economic growth remains stable but carries considerable risks associated with possible corrections in trade flows and the fragile momentum of economic activity.

• Inflation, though moderating in certain sectors, remains a focal point, particularly regarding goods prices and the evolution of the U.S. dollar.

For analysts, investors, and policymakers, this moment calls for a prudent and vigilant approach, closely monitoring developments in trade policy and their broader impacts on global economic stability.