Since early 2025, the global economic landscape has undergone a profound restructuring. Driven by the current US administration’s aggressive trade posture, sweeping deregulation, and tightening immigration controls, the world economy has shifted from a trajectory of steady normalization to one of heightened friction and divergent growth. Here is a factual breakdown of how the global economy has fundamentally changed over the past year:
1. The Tariff Shock and Slower Global Growth
The most consequential policy shift has been the implementation of both universal and targeted US import tariffs. With duties leveraged against major trading partners—including China, Canada, Mexico, India and the EU—the average effective US tariff rate has surged to its highest level in decades (with estimates ranging from 9.9% to over 20%, depending on retaliatory scope).
The OECD expects global growth to ease from 3.2% in 2025 to 2.9% in 2026. It adds, near-term activity is expected to soften as higher effective tariff rates gradually feed through, weighing on investment and trade, amid persistent geopolitical and policy uncertainty. Highly integrated North American economies are bearing the brunt. Mexico faces a severe economic contraction, and Canadian growth forecasts have been dramatically reduced.
One of the most consequential developments was the escalation of trade tensions between the United States and China. The U.S. imposed tariffs on hundreds of billions of dollars’ worth of Chinese imports, prompting retaliatory tariffs from China. According to assessments from the International Monetary Fund, this dispute contributed to a slowdown in global trade growth back in 2019 as well as in 2025, reflecting reduced cross-border investment and increased uncertainty for multinational firms. OECD expects China’s economic growth to contract to 4.4% in 2026 and 4.3% in 2027, from 5% in 2025 as tariffs on its exports had sharply increased.
2. “Sticky” Inflation and the Interest Rate Plateau
While inflation was cooling globally throughout 2024, the imposition of new trade barriers in 2025 acted as a negative global supply shock.
Tariffs have effectively operated as a consumption tax. Research from the Tax Foundation and the Yale Budget Lab indicates these duties are costing the average US household between $1,000 and $2,100 annually in lost purchasing power.
Consequently, US core inflation has remained stubbornly stuck between 2.5% and 2.8%. This “sticky” inflation has forced the US Federal Reserve to scale back anticipated interest rate cuts. This keeps global borrowing costs higher for longer, placing heavy pressure on emerging market currencies as the US Dollar remains dominant.
3. The US Domestic Tug-of-War: Deregulation vs. Trade Costs
Within the United States, the economy is experiencing a volatile push-and-pull effect from conflicting policy measures.
Aggressive federal deregulation—particularly in the financial and energy sectors—combined with the extension of the Tax Cuts and Jobs Act has fueled corporate profitability. This spurred a massive stock market rally, with the S&P 500 hitting dozens of record highs in 2025, while Q3 2025 saw a strong real GDP surge of 4.3%.
Conversely, the economic drag of tariffs and a sharp reduction in labor supply (driven by negative net migration and strict border enforcement) are capping long-term growth potential. Economists warn that the long-term drag from trade friction and reduced labor pools threatens to eventually offset the domestic benefits of corporate tax cuts.
Conclusion
In aggregate, the global economy after these policy changes was characterized by higher trade frictions, increased policy uncertainty, and adjustments in supply chains. International institutions and economic studies generally concluded that while some domestic sectors benefited from protection and tax relief, global growth and trade integration experienced measurable constraints during the period.