The global economy has continued to expand at a healthy pace and is likely to maintain this momentum next year. The trade war inflicted limited damage as most countries refrained from retaliating, and it ended before global supply chains were materially affected. US fiscal and monetary policy have turned accommodative, with tax cuts and interest rate reductions supporting growth. Key risks to a positive outlook include a misjudgment of the damage dealt by the trade war, the possibility of renewed trade tensions, and a technology-driven correction in the stock market.
Global growth: Resilient
The global economy looks set to grow at a robust pace this year and next. The International Monetary Fund (IMF) projects global growth of 3.2 percent in 2025 and 3.1 percent in 2026 — close to its long-term trend. Regionally, the IMF expects growth of 2 percent in the US, 1.2 percent in Europe, and nearly 5 percent in China.
The global economy has therefore weathered the US president Donald Trump’s tariff shock with limited damage — though some of the effects are merely delayed, as many firms have yet to pass most tariffs on to consumers.
As the cycle evolves, old risks merge with new ones. The US–China relationship remains vulnerable to renewed confrontation, while the immense wealth created by AI-related stocks means that any disappointment could trigger a wealth shock. Still, there are good reasons to believe that a renewed trade war is unlikely, and while the AI trade shows bubble-like symptoms, valuations remain far below the extremes seen during the dot-com era.
Why the rest of the world surrendered immediately in the trade war
The reasons the trade war dealt limited damage are twofold. The first fear was that, after US tariffs, other countries would retaliate, prompting another US response and creating a spiral of protectionism. That spiral never happened. The US imposed tariffs, but with the exception of China, most countries chose not to retaliate.
In game-theoretic terms, a trade war is a dynamic process in which players react to each other’s beliefs. What occurred instead was a one-shot event: the US imposed a tax on the rest of the world — one ultimately borne largely by the American consumer. Global growth suffered only modestly because of the restraint shown by US trading partners.
Why the restraint? Many governments assumed the tariffs would be temporary, as Trump cannot seek re-election. Joe Biden rescinded Trump’s first-term tariffs, and many expected a repeat. Europe, meanwhile, worried about losing US support for Ukraine, while East Asian economies feared a weaker US stance toward China. The Trump administration effectively bundled security and trade policy into a single negotiating stance to extract concessions from its allies — an unprecedented approach. From a broader perspective, the European, Japanese, and South Korean response was both responsible and prudent.
Rare leverage and mutually assured recession
The second reason the trade war caused limited economic harm was its brevity. The US entered the confrontation believing it held the upper hand through dominance of the semiconductor and AI stack — from chipmaking equipment to design software and chips themselves.
While that was true, China’s control over rare-earth metals — mining 70 percent and processing 90 percent of global supply — gave it powerful counter-leverage. When China halted exports of rare-earth magnets, Ford even announced a temporary closure of its Chicago factory. Other manufacturers would likely have followed, since rare-earth magnets, though small components, are essential inputs.
The short duration of the trade war meant tariffs remained in place too briefly to inflict lasting supply-chain damage. Inventories proved sufficient to bridge temporary disruptions.
Why trade tensions will flare — but not derail the global economy
Geopolitical risk remains a key threat to the global outlook. The Trump administration has attacked US institutions such as the Federal Reserve and immigration policy, as well as global institutions like free trade. Independent central banks, labour immigration, and open trade have all been positive for US and global growth — so undermining them would be negative. Yet these are unlikely to trigger an outright recession. The erosion of institutional credibility tends to produce slow decay rather than sudden shocks.
A renewed US–China trade war, however, would be recessionary. Fortunately, the first confrontation revealed how deeply interdependent the two economies are. Both sides hold such powerful leverage that a full-scale conflict would inflict massive damage on each — amounting to a case of mutually assured recession (MAR), analogous to the nuclear “mutually assured destruction” (MAD) of the Cold War. The US and China will continue to strengthen their weak points and hinder one another where possible, but likely within controlled limits. The US will expand rare-earth mining; China will build semiconductor capacity. Both will take time.
Delayed damage and policy countermeasures
Much of the tariff damage has not yet materialised because US companies have absorbed most of the costs. Over time, they will pass them on, but likely in staggered fashion to avoid political backlash. Consumers will face somewhat higher prices, but since most spending is on services rather than goods — and tariffs apply only to a subset of imports — the impact on living costs should be modest.
Tariff uncertainty has weighed on hiring. The labour market has stalled rather than collapsed: unemployment remains low, helped by reduced immigration, though at the cost of weaker growth.
Both monetary and fiscal policy are now supportive. The Federal Reserve has begun cutting rates and is likely to continue doing so given labour-market softness. Most Fed officials view tariffs as a one-off price-level shock rather than a source of persistent inflation, allowing rate cuts even as prices rise. Fiscal policy is also expansionary, with the Trump administration pushing through tax cuts despite a large deficit.
Figure 1: Economists expect the largest economies to continue to grow in robust fashion
Figure 2: Markets expect the Fed to continue cutting rates whilst the ECB remains on hold
Much rides on technology stocks and the artificial intelligence boom
Technology stocks have become the core of the stock market and hence narratives related to the future performance of technology stocks have become critical for the performance of the entire stock market. Technology stocks account for close to 60 percent of US stock market capitalisation and over 20 percent of emerging market stocks. European stocks have the least exposure. A sharp correction in technology and hence global stocks would therefore erode household wealth and weaken consumption, hurting economic growth.
The prime narrative with respect to technology stocks is the rise of artificial intelligence. There are widespread fears that artificial intelligence has become a bubble and there are unmistakable bubble symptoms. There is general hype about 3-day work weeks as robots displace humans. The meteoric rise of stocks tied to artificial intelligence with no revenues, which is very reminiscent of the dot com bubble. There is vendor financing — where Nvidia will invest up to $100 billion in OpenAI, part of which flows back into GPU purchases from Nvidia itself.
There are significant differences between the dot-com bubble and today’s AI boom. During the dot-com bubble technology companies built vast fibre networks with the expectation that there would be demand. A year after the crash, 85 percent of fibre capacity lay idle. The AI boom is different in that data center supply cannot meet existing demand due to shortages in chips, power and skilled labour.
However, the real test of a bubble is valuation, or more specifically, inflated valuations. After all a bubble is about investors willing to pay a significant premium over fundamentals because the future outlook is exceptionally bright. As a group, the key technology companies of today — Nvidia, Microsoft, Amazon, Google and Meta — are priced at significantly lower valuations compared to the leaders of the dot-com bubble: Cisco, Nortel, IBM, Intel and Microsoft. The key reason is that today’s technology leaders are much more profitable and have significantly stronger balance sheets than the leaders of the dot-com era. The key feature of a bubble are extremely high valuations, which is still lacking from today’s market.
Another key feature of a bubble is that many investors are willing to take part in the market ride, not because they believe in the future, but expected others to continue to do so. The bubble and boom dynamics are intricately linked to expectations and hence news related to whether the story is intact. This in turn means that the boom is tested from time to time, which means volatility. Therefore, valuations are not at bubble levels, but corrections may very well occur as the artificial intelligence narrative gets tested.
Figure 3: Stocks have recovered from the trade war scare and their former trend
Figure 4: The Magnificent 7 are not in bubble territory in terms of valuation
