India Rare Bright Spot in Slowing and Uncertain Global Economy

Impact of higher tariffs will be on full display in coming months with subdued private sector sentiment, higher inflation, and softening labour market conditions.

By Pradeep Kumar Panda

Bhubaneswar, July 29, 2025 — Global economic momentum in 2025 is projected to remain modest and increasingly uneven, with real GDP growth expected to slow to 3.0% in 2025 and 2.9% in 2026 from 3.2% in 2024. Rising trade frictions, geopolitical instability, and fiscal constraints are reshaping the global landscape, with diverging regional trajectories. Developed economies are set to lose steam while emerging markets show mixed resilience.

In developed markets, real GDP growth is expected to moderate to around 1.3% in 2025 and 2026, following a 1.8% advance in 2024. The US economy will no longer be the outperformer, with real GDP growth expected to decelerate from 2.8% in 2024 to 1.5% and 1.3% in 2025 and 2026, respectively.

The impact of higher tariffs will be on full display in coming months with subdued private sector sentiment, higher inflation, softening labour market conditions, margin pressures, reduced business investment and weakening consumer demand.

In Europe, a fragile recovery is underway, buoyed by disinflation and real income gains along with stronger fiscal tailwinds. However, the imposition of US tariffs along with rising policy uncertainty will constrain the upside for business investment and exports.

Euro area growth may remain subdued around 1.0% in 2025 and 1.3% in 2026 with disparities across economies. Japan’s economic recovery also remains modest, with GDP growth projected at 0.7% in 2025, following a 0.1% advance in 2024. While steady wage gains and a gradual rebound in consumer spending offer support, external headwinds from trade tensions and structural challenges will continue to weigh on momentum.

Across emerging markets, real GDP growth may hover to 4.1% in 2025 and 3.9% in 2026, from 4.2% in 2024. China’s economy faces headwinds from a prolonged property downturn and demographic drag as well as renewed pressures from trade tensions and US tariffs.

Forecasts show real GDP growth decelerating from 5.0% in 2024 to 4.4% in 2025 and 4.0% in 2026 despite continued policy support. India remains a global bright spot, underpinned by infrastructure investment and strong domestic demand, with GDP growth projected at 6.6% in 2025 and 6.5% in 2026, following a 6.7% advance in 2024.

Latin America may see modest growth, with momentum in Brazil softening amid tighter financial conditions and fiscal constraints, and growth in Mexico constrained by trade tensions with the US.

Global inflation is projected to ease further in 2025, though progress will be uneven. For economies imposing tariffs, such tariffs will act as a supply shock feeding inflationary pressures. In contrast, the duties will act as a negative demand shock and weigh on inflation in tariffed economies.

Inflation and Monetary Policy: Divergence Deepens

Global inflation is expected to decline from 4.5% in 2024 to 3.6% in 2025, though progress remains uneven. Tariffs are pushing inflation higher in the US, while other economies see continued disinflation. Emerging markets face cost pressures and currency volatility.

Central banks are recalibrating cautiously. The US Federal Reserve is adopting a measured stance amid conflicting growth and inflation signals. The ECB is easing more decisively, while the Bank of Japan continues gradual tightening. Emerging market central banks are taking a reactive, risk-sensitive approach.

Fiscal Policy: Rising Debt, Limited Space

High debt and political pressures are constraining fiscal strategies. The US faces widening deficits due to tax cuts and rising interest costs. Europe is easing fiscal restraints, while emerging economies like India continue targeted investments despite limited space.

The broader concern is diminishing fiscal room to support long-term growth, exacerbating borrowing costs and limiting future stimulus options.

Six Structural Themes Shaping the Global Outlook

Global Reordering: Tariff wars, geopolitical risks, and retaliatory measures are disrupting global trade, prompting businesses to diversify supply chains and governments to pursue defensive strategies.

Financial Markets Repricing: US fiscal uncertainty and trade tensions are undermining investor confidence, weakening the dollar, and increasing market volatility.

Inflation and Supply Fragility: Policy-induced price volatility, especially from tariffs, is reshaping inflation dynamics and challenging traditional economic management.

Monetary Divergence: Central banks face diverging paths, with policy increasingly influenced by external shocks, tariffs, and currency pressures.

Fiscal Tightrope: Balancing stimulus with sustainability is more difficult amid high public debt, social pressures, and defense spending needs.

Labour Market Transformation: Demographic shifts, talent shortages, and the rise of AI are pushing economies to focus on productivity and digital transformation.

Outlook: Resilience with Risk

Despite persistent headwinds, the global economy is navigating the current turbulence with resilience. However, volatility in trade, inflation, policy, and geopolitics continues to cloud visibility for businesses and investors. As economies adapt to a new era of uncertainty and fragmentation, agility and long-term strategic planning will be key to stability and growth.

Financial markets: repricing risk in a shifting landscape

Global financial markets are undergoing a fundamental shift, marked by the breakdown of long-standing correlations between asset classes. A striking example is the weakening of the US dollar despite rising Treasury yields — a decoupling that signals deepening investor unease about the US fiscal trajectory, rising public debt and escalating trade tensions.

This reassessment is prompting a broader repricing of risk. Dollar-denominated assets, once viewed as safe havens, are now being re-evaluated, triggering a pivot toward global portfolio diversification.

The softer dollar, while supporting export competitiveness for many emerging markets, is also amplifying currency volatility and complicating central bank policy choices across other regions.

Meanwhile, equity markets appear to be pricing in a soft-landing scenario with surprising confidence, discounting the inflationary and growth-dampening effects of sustained tariff regimes. The persistence of policy-driven shocks — via trade, regulation and fiscal stimulus — is feeding into market dynamics that are increasingly disconnected from macroeconomic fundamentals.

Against this backdrop, investors are adopting a more cautious and selective approach; reassessing asset valuations; and navigating a more fragmented, politically influenced global financial landscape.

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