Thoughts

August 01, 2025 | 15:53

There’s a Number Now, But It Could Still Change

Economist

Jennifer Lee

Senior Economist and Managing Director
Economics

(Read more)

Jennifer Lee

Senior Economist and Managing Director
Economics

(Read more)

Realizing not everything can be timed perfectly, but the IMF’s upgrade to global GDP this week… wow. The August 1 deadline had been known for some time, but there were other releases that made the timing of the report confusing, including second quarter GDP for Europe.

In any event, the IMF raised its global GDP forecast to 3.0% for 2025 (was 2.8% in April) and by 0.1 ppts to 3.1% for 2026. However, it wasn’t due to anything particularly positive: rather, the “tremendous amount” of front-loading ahead of tariffs. Meantime, this week saw a series of mixed GDP readings for Q2 across Europe and the picture was muddied. For example, after revisions, Germany was in recession during the first half of 2024; and, more recently, the economy contracted again in Q2 (down 0.4% annualized). Italy has also faltered (-0.3% a.r.) But there were pockets of strength elsewhere, such as in France (+1.2% a.r.) and Spain (+3.0% a.r.)—the latter thanks to a huge boost from tourism. That helped the broader Euro region grow at a 0.4% annualized pace.

What happens in the second half? There is some clarity: we now know that Europe’s U.S.-destined exports will face a 15% tariff. But so far, there are no carve-outs, including for wine and spirits, which will hurt France and Italy. Tariffs on U.S.-made cars were also removed to the detriment of European automakers. Leaders are furious about the deal, and accused European Commission President Ursula von der Leyen of capitulating. But negotiations will continue, apparently, so this is likely not the end. Meantime, the EU will continue to diversify its customer base, and form new/updated agreements with other countries (including Australia, India, the Philippines and Singapore). Europe can put aside its regional differences and start building better infrastructure and weaponry to defend its borders in the spirit of the new NATO spending goal.

Bottom Line: This is not the conclusion that Europe wanted, but clearly having no tariffs was a pipe dream. However, the U.S. accounts for 20% of Europe’s exports: there is much more inter-regional trade, which can support broader growth. And the fiscal stimulus promised by Brussels and Germany will also go a long way in coming years. We just need to get through the next few months of ongoing talks.