The global economy is projected to experience a slowdown in growth through 2026, with tariffs remaining a significant factor. The International Monetary Fund (IMF) has forecast a global growth rate of 3.1% in 2026, down from a previous projection of 3.3% and below the pre-COVID-19 average of 3.7%. The impact of tariffs has been partially mitigated by various factors, while trade relations between major economies, commodity markets, and legal rulings are expected to shape the economic landscape.
Economic Growth Forecasts
The IMF has revised its global growth forecast downward to 3.1% for 2026. IMF managing director Kristalina Georgieva stated that current growth rates are insufficient to meet global aspirations for improved living standards. Other economic forecasts for 2026 present growth projections lower than the IMF's outlook.
Tariff Impact and Mitigation Factors
Tariffs have influenced the global economic landscape and are projected to continue doing so through 2026. According to Maurice Obstfeld, a former chief economist at the IMF and senior fellow at the Peterson Institute for International Economics, the overall impact of tariffs on the global economy has been less severe than initially projected. He attributes this to limited retaliatory actions by countries against the United States and China's forceful response, which led to a rapid de-escalation by the US, preventing a more significant trade disruption.
"The overall impact of tariffs on the global economy has been less severe than initially projected." — Maurice Obstfeld, Peterson Institute for International Economics
Despite this, the United States and China maintain more tariffs and trade restrictions against each other than existed prior to the second Trump administration. These measures have increased costs for businesses and contributed to economic uncertainty, impacting long-term planning and investment.
Factors that have partially mitigated the adverse effects of tariffs include:
- Lower interest rates
- A decline in the value of the US dollar
- Adaptive business strategies
- Numerous tariff exemptions
The UN trade agency UNCTAD forecasted a 7% growth in global trade last year, reaching over $35 trillion (£26 trillion). Several countries, including the UK, South Korea, and Japan, have secured trade agreements with the US, and other nations may seek similar outcomes in 2026.
Research on Tariff Burden
Multiple studies have examined who bears the cost of US tariffs:
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Kiel Institute for the World Economy: A study analyzing over 25 million shipment records (totaling nearly $4 trillion) from January 2024 to November 2025 concluded that US importers and consumers bore approximately 96% of tariff costs, while foreign exporters absorbed about 4%. The study found a "near-complete pass-through" of tariffs to US import prices.
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JPMorganChase Institute: Research focusing on "middle market" companies (revenues between $10 million and $500 employees) found that tariffs paid by these businesses tripled over the past year. These companies reportedly implemented higher prices for customers, reduced their workforce, or accepted decreased profits to absorb the new expenses. Payments to China by these companies were 20% below October 2024 levels, suggesting a potential shift in supply chains.
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New York Federal Reserve: An analysis indicated that the average US tariff rate rose from 2.6% to 13% by the end of last year. For the initial eight months of the year, approximately 94% of the cost was incurred by US importers, decreasing to 86% in the final months.
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Congressional Budget Office (CBO): An assessment stated that higher tariffs would temporarily elevate the US inflation rate, decrease real investment, lower real GDP, and reduce employment. The CBO estimated that US businesses would absorb 30% of import price increases by reducing profit margins, with the remaining 70% passed on to consumers. The CBO concluded the net effect was a 100% increase in US consumer prices relative to the domestically borne costs of the tariffs, which it estimated at 95% of the total cost.
US Economic Performance and Inflation
Between July and September, the US economy expanded by 4.3%, representing its strongest annual growth in two years. Aditya Bhave, a senior economist at Bank of America, described the US economy as resilient. He estimates that tariffs have contributed between 0.3% and 0.5% to US inflation, which stood at 2.7% in November. Academic economists estimate that consumer prices are approximately 0.8 percentage points higher than they would otherwise be due to tariffs.
"The US economy is resilient." — Aditya Bhave, Bank of America
The US economy, driven significantly by consumer spending, accounts for 26% of the global economy, according to the IMF. Despite these analyses, the overall impact on the US inflation rate has not been as pronounced as some might expect, with the headline CPI at 2.4% and core inflation (Personal Consumption Expenditures index) at 3%.
Cost of living pressures persist globally. Eurozone inflation has stabilized at 2.1%. The UK's inflation rate is 3.2%, while the US rate is 2.7%, both above their respective central banks' 2% targets.
US consumers observed price increases for items such as toys, appliances, furniture, and specific foodstuffs. Several major retailers, including Target, Walmart, and Adidas, indicated their intention to pass tariff-related costs onto customers. The cost of goods manufactured in the US using imported components was also projected to rise.
Tariff costs initially affect American importers and wholesalers. Subsequently, these costs are often transferred to manufacturers and retailers, ultimately leading to higher prices for American consumers on both imported goods and American-made products that utilize foreign components. The study also noted a more limited availability of goods within the US market.
Rationale Behind Tariff Use
Former President Donald Trump articulated several reasons for employing tariffs, including increasing government tax revenue, promoting domestic consumption of American-made products, and boosting investment within the United States. A primary goal was to narrow the US trade deficit, which represents the difference between the value of goods imported versus exported. The administration maintained that the US had been unfairly exploited by foreign trading partners.
Beyond economic aims, tariffs were also utilized to exert pressure for other demands, such as urging China, Mexico, and Canada to enhance efforts against illegal immigration and the flow of fentanyl into the US. Many announced tariffs underwent subsequent amendments or delays.
Steel and Aluminum Tariffs
The Trump administration is reportedly considering modifications to the effective rates of tariffs applied to US imports of steel and aluminum. Initially set at 25%, these tariffs were increased to 50% shortly after the administration took office last year. The tariffs encompass not only raw steel and aluminum but also "derivative" products, meaning the foreign metal content in a broad array of imported consumer goods.
US Treasury Secretary Scott Bessent confirmed that a "clarification" of the tariffs is under consideration. The steel and aluminum tariffs were imposed under a different legislative authority than other tariffs currently facing legal challenges, suggesting that any reduction would likely be driven by affordability issues.
Legal Challenges to Tariffs
The legality of the Trump administration's tariffs faced multiple legal challenges. Instead of seeking Congressional approval, the administration invoked the 1977 International Emergency Economic Powers Act, which allowed for immediate orders by declaring an emergency and bypassing Congress. In August 2025, a US appeals court determined that most of these tariffs were illegal but permitted them to remain in effect. The White House subsequently requested the US Supreme Court to review this decision. The Supreme Court is expected to issue a ruling on whether the declaration of an economic emergency exceeded presidential legal authority.
Other Global Economic Influences
Several other factors could influence the global economy in 2026:
- Trade Agreements: The renegotiation of the US-Mexico-Canada Agreement (USMCA) and a pending EU vote on ratifying a South American trade deal.
- Oil Prices: Goldman Sachs forecasts an approximate 8% fall in Brent Crude oil prices this year, to around $56 per barrel. That forecast is based on strong production in the US and Russia. Interventions in Venezuela are not projected to significantly increase global oil supplies in the short term.
- Shipping Routes: The resumption of global shipping through the Red Sea could exert downward pressure on prices. Maersk reported sending a container ship through the Red Sea in late December after nearly two years of avoidance due to Houthi rebel attacks linked to the conflict in Gaza. Major shipping companies have largely rerouted around southern Africa, incurring longer and more expensive journeys.
US-China Trade Relations
China, a significant global manufacturing hub, continues to navigate complex trade relations with the US. Data indicates that the value of goods exchanged between the two largest economies decreased for the third consecutive year in 2025. President Xi Jinping's 2026 New Year message did not explicitly address these trade strains or domestic economic pressures but projected China's economy to reach $20 trillion and affirmed its readiness to collaborate on global peace and development.
Key topics in US-China discussions include tariffs, US access to rare earth metals, and Chinese access to high-end US computer chips. James Zimmerman, chairman of the American Chamber of Commerce in China, noted that expectations for the upcoming April meeting between President Xi and former President Trump are low, but sustained dialogue is crucial.
China's stated concerns include perceived restrictive environments for Chinese companies in certain markets, partly attributed to an overemphasis on security concerns. US concerns include China's management of its manufacturing output, particularly regarding "overcapacity." This refers to situations where China's manufacturing output, especially for consumer goods, exceeds demand, potentially leading to increased exports to global markets.
Specific Tariff Situations by Country
- China: Initially faced threats of over 100% tariffs from the US, with reciprocal threats from China. A truce was extended, and in October, Trump announced a pending trade deal and an immediate cessation of some tariffs related to Beijing's role in fentanyl ingredient flow. Tariff exclusions on 178 Chinese products were extended until November 2026, though other tariffs persisted on non-exempt goods.
- Canada: Subject to 35% tariffs on goods, though most were exempt under the USMCA free trade agreement. Additionally, Canada was affected by a 50% levy on imported metals and 25% on non-US automobiles. After an anti-tariff advert broadcast by Canada, Trump suspended trade discussions and threatened to raise Canadian levies by an additional 10%, leading to an apology from Prime Minister Mark Carney.
- Mexico: Faced 30% tariffs on goods, alongside sector-specific levies and a 25% fentanyl tariff. Similar to Canada, most Mexican goods were exempt under the USMCA. These tariffs were temporarily halted until the end of October to facilitate a deal, with the deadline later extended by several weeks following an agreement between President Claudia Sheinbaum and Trump.
- United Kingdom: In June 2025, the UK secured a 10% US tariff rate, which was the lowest negotiated rate at that time. This rate applied to the first 100,000 UK vehicles exported annually, with additional vehicles incurring the standard 25% tariff. The agreement also facilitated reciprocal beef trade and granted 0% tariffs on some US ethanol. Although Trump announced the deal as complete, the anticipated complete removal of all charges on steel imports from the UK was reportedly put on hold, with the UK paying 25% instead of 50%. Trump later expressed willingness to refine the deal.
European Market Dynamics
European reliance on Chinese imports is increasing, according to research from ING, a Dutch bank. The European Union is considering measures to address this trend in the coming months.
Trade Deficit and Supply Chain Shifts
Trade data from the Census Bureau shows that the US trade deficit increased last year by $25.5 billion, reaching $1.24 trillion. This occurred despite President Trump's stated goal of reducing the trade imbalance through tariffs.
The JPMorganChase Institute analysis suggests a potential shift in supply chains, with payments to China by mid-sized US companies being 20% below October 2024 levels. However, it remains unclear whether this signifies a genuine shift in manufacturing locations or a rerouting of goods through other countries.