In a new report from Citi Research, Chief Economist Nathan Sheets and a team of analysts and economists offer their expectations for global growth and consider the upside and downside risks to their forecast. They also look at the effects of U.S. tariffs and how these costs are being borne.
The global economy has kept moving forward. During the year’s first half, growth slowed to around 2.5%, down from near 3% in 2024. But consumers and firms have absorbed tariff-related uncertainties surprisingly well, leaving our narratives for global inflation, monetary policy and markets broadly in place.
For example, global purchasing managers’ indices (PMIs) have generally moved in line with what we saw last year, with services outperforming manufacturing. The services PMI retreated through the spring, but in recent months it’s bounced back to the favorable levels seen during last year’s second half. Meanwhile, the manufacturing PMI has remained around the 50 breakpoint between expansion and contraction.
Similarly the Citi surprise index for the global economy has also performed well, with recent months’ readings running higher than in the second half of last year. While this doesn’t necessarily signal outright strength in the data, it does at least indicate that performance has surpassed expectations.
So far, the effects of U.S. tariffs — and the associated challenges for the global economy — have mainly shown up in indicators of international trade. For example, the PMI for global export orders fell through the spring. This series has climbed back up more recently, but remains below the 50 breakpoints.
Tariffs were expected to weigh on the global economy primarily by reducing U.S. demand for foreign products. But foreign exports have actually been strong relative to trend, as we saw a surge in U.S. imports in late 2024 and early 2025 due to U.S. households and firms looking to front-run the tariffs. So this mechanism of tariff transmission has been slow to emerge.
During the first half of 2025, many countries saw their exports to the U.S. expand more rapidly than to the rest of the world. Notable exceptions were countries front and center in the Trump administration’s tariff initiatives: China, Canada, South Korea, Japan and Mexico. China has been hit particularly hard, with its first-half exports to the U.S. down more than 10% from a year earlier.
In recent months, however, U.S. imports have retreated to levels at or even slightly below what we saw last year, with foreign exports moving down roughly in tandem. As such, the tariffs’ restraining effects are now starting to be felt. We anticipate that the tariffs will take a bite out of the real spending of households and firms through the second half of this year, and note that front-loaded purchases that were pulled forward will need to be paid back.
As these effects play through, we see global growth slowing to below 2% in the second half before rebounding to nearly 3% in the first half of 2026. We judge that the risks to our forecast are roughly balanced. On the upside, the global economy has shown resilience over the past few years, and may shake off any further softening from the tariffs. On the downside, more powerful downdrafts from the tariffs may yet emerge. Even so, the likelihood of severe downside risks strikes us as diminishing with each passing month.
How will U.S. tariffs’ effects be distributed?
A key question is how the tariffs’ effects are likely to be distributed across key sectors, including foreign exporters, U.S.
firms, and U.S. consumers.
President Trump continues to aggressively implement tariffs. By our reckoning, currently announced tariffs imply an overall U.S. tariff rate of around 18%. We envision that the tariff rate could top 20% once further sectoral tariffs are fully implemented, including ones on pharmaceuticals and electronics. Additional trade deals may bring tariff rates down from these levels, but the scope of negotiations looks to have narrowed. We judge that the effective tariff rate is likely to remain above 15%, the highest level in decades.
It’s also clear that a sizable portion of these tariffs is already being collected. Tariff revenues have surged from $75 billion last year to an annual rate above $330 billion in July, corresponding to an ex post effective tariff rate of 11%. Given the revised reciprocal tariffs announced in July, as well as forthcoming sectoral tariffs, we expect that tariff revenues will keep rising through the coming months.
The incidence of these tariffs is necessarily distributed across three groups: foreign exporters, importing U.S. firms, and U.S. consumers.
Faced with rising U.S. tariffs, foreign exporters may choose to absorb the tariffs into their margins. This would manifest itself as a decline in U.S. import prices, as such prices are reported at the foreign dock before tariffs are assessed. So far, we see only limited evidence of such behavior; the level of U.S. import prices has been generally flat over the past couple of years.
Considering disaggregated data for import price inflation in capital goods, autos and consumer goods, autos show the clearest signs that exporters are squeezing their prices, which fits with other reports indicating Japanese auto exporters, in particular, have cut their prices in response to the tariffs. Even so, the decline is small relative to the 25% tariff imposed by the U.S., as well as the run-up in import prices for autos since the pandemic.
An alternative to foreign exporters is that U.S. consumers could bear the tariffs in the form of higher prices. Some evidence of this has emerged in recent months: Since February, U.S. core goods inflation has risen to 1.2%, with observed price increases particularly large for product categories such as audio equipment, window and floor coverings, furniture and bedding, and toys. In tandem, the number of goods subsectors experiencing large monthly price gains has risen.
These data suggest a simple back-of-the-envelope estimate for the share of the tariffs being borne by consumers. With the collection of tariff revenues pointing to an ex post tariff rate of 11%, along with the fact that 30% to 40% of goods are imported, the recent rise in core goods inflation suggests consumers have borne roughly 30% to 40% of the cost of tariffs to date.
Going forward, we see scope for core goods inflation to rise further as reciprocal and sectoral tariffs come online. And the U.S. corporate sector appears to be absorbing a large share of the tariffs, which may not prove sustainable.
This points us to the margins of U.S. firms. To date, U.S. firms have borne the lion’s share of the tariffs, apparently absorbing 60% to 70% of the cost.
Consistent with anecdotal reports, a number of factors have likely contributed to this outcome.
First, with consumers still reeling from COVID-era price increases, the scope to pass along further price increases may be limited.
Second, given uncertainties, firms may have preferred to hold their prices to see where tariffs ultimately land.
Third, some goods have natural product cycles, which may entail seasonal (or even annual) price changes. For example, many apparel and leisure products are introduced and priced according to shifting seasonal needs.
Fourth, and more broadly, firms may prefer to increase their prices gradually to maintain goodwill with customers, gauge the robustness of demand, and observe competitors’ responses.
Even so, absorbing such a large share of the tariffs is likely unsustainable for the corporate sector as a longer-term strategy. As such, we expect U.S. firms will increasingly seek to shift the cost of tariffs to U.S. consumers and their foreign suppliers. That said, so far signs of pressure have been limited. While firms have pointed to tariffs as squeezing margins, the overall tone of earnings reports has been generally positive, and explicit measures of firms’ margins have remained solid.
Source: Citi
