Global Economy Risk Assessment
Global Economic Risks Multiply Amid Trade Tensions and Fiscal Strain
By The Better Policy Project | April 22, 2025
A Mounting Storm for the Global Economy
Macroeconomic uncertainty is intensifying as trade policy shocks, fiscal risks, and geopolitical tensions converge to reshape the global outlook. The Better Policy Project’s April 2025 Global Economic Risk Assessment details how newly imposed U.S. tariffs have triggered a marked deterioration in the growth outlook and exposed deep vulnerabilities across major economies. The report presents three scenarios—ranging from a moderate slowdown to a full-blown macroeconomic crisis—that outline how current policy developments could define the next stage of global economic evolution. Below is a summary of the key insights, along with access to the full report and an audio version.
Global Economy Risk List
Higher Interest Rate Risks
The US fiscal situation has already raised the question of a possible debt monetization risk but Fed independence being questioned would accelerate this risk. The recent rise in 10-year bond rates while the USD weakened is a symptom of this risk.
Inflationary pressures from possible policy shift in the US – tariffs, tax cuts, immigration restrictions.
New fiscal packages have the potential to boost growth across the Euro Area and China.
Inflationary pressures in Russia, coming from tight labor markets and rise of domestic demand.
Geopolitical tensions in the Middle East, Iran sanctions put an upward risk on oil prices.
Strong demand in the US due to high asset prices supporting consumption through a large wealth effect.
Lower Interest Rate Risks
The US fiscal situation could lead to serious fiscal consolidation or debt sustainability concerns could send sensitive equity prices to nosedive and generate a recession.
Rising US policy uncertainty erodes consumer confidence, threatening domestic and global investment and spending.
Slowdown in China due to property market problems leading to weaker domestic demand, consumer and financial market sentiment.
US tariffs depressing Chinese exports, deepening stagnation and threatening China’s opaque financial system.
US stock market is in a possible bubble where a correction would dampen demand. Mere policy uncertainty could be the catalyst.
Concerns over weak demand in China combined with economic uncertainties, are adding downward pressure on global oil demand.
What Changed in April?
The April update marks a decisive downgrade in the global growth outlook, with projections revised down by 0.5 percentage points. At the heart of this revision lies a dramatic escalation in U.S. tariff policy, which is now acting as a global stagflationary force. The new tariffs are reducing U.S. output, disrupting bilateral trade flows, and dampening confidence across both developed and emerging markets. While fiscal stimulus in Europe and China had briefly lifted sentiment, these gains have been neutralized. Three scenarios are now outlined: a moderated April baseline, a global growth recession, and a crisis scenario reminiscent—though milder—than the 2008 financial crisis.
Global Economy
U.S. economic uncertainty is reaching new highs as markets reel from a storm of destabilizing moves coming out of the White House. These fears and uncertainties have swiftly materialized in financial markets, with the S&P 500 and NASDAQ Composite both entering sharp declines in response to each new escalation of the administration’s protectionist push. Beginning with tariffs on Canada and Mexico in early February and accelerating through March’s barrage of steel, aluminum, and automotive duties, investors have been forced to reassess earnings outlooks and global trade dynamics in real time. The decisive blow came on April 2—"Liberation Day"—when sweeping, unilateral tariffs were imposed, triggering a broad market selloff. Though brief reprieves followed announcements of select exemptions, the damage was done: equities had lost significant ground by mid-April, underscoring how policy volatility can quickly translate into real economic and financial instability.
Source: Fred
The rising economic uncertainty could escalate into a "crisis of confidence," sharply curbing consumer spending and investment activity in both the U.S. and the global economy. As financial losses mount and policy direction remains erratic, households and businesses may increasingly retreat into precautionary behavior. This widespread hesitancy risks turning a policy-induced shock into a broader economic contraction. A 20–30% equity correction could erase over $20 trillion in household wealth, weakening the consumption backbone of the economy and amplifying global spillovers. In such a fragile environment, confidence—not just capital—becomes the most scarce and consequential asset.
Source: investing.com
United States
Amid the backdrop of a weakening economy, the U.S. is pressing ahead with an aggressive, deficit-financed tax cut package, intensifying scrutiny over fiscal sustainability. The bond market is flashing warning signs: 10-year Treasury yields have climbed notably in recent weeks, yet the term premium—the extra compensation investors demand for holding long-term debt—remains unusually subdued. This disconnect signals that markets may be underpricing the depth of fiscal risk. The specter of debt monetization is no longer hypothetical: with fiscal deficits expanding rapidly and the Federal Reserve’s independence being publicly challenged, the path to central bank financing of public debt appears less far-fetched. This toxic mix—fiscal expansion amid weakening growth, political interference in monetary policy, and a bond market increasingly skittish—creates a fragile foundation for economic stability.
Source: FRED
Euro Area
Germany’s fiscal response to stagflation initially sparked optimism—reflected in a spike in bond yields and a strengthening euro—but as global risks mounted, bond markets reversed even as the euro continued to appreciate, signaling a deeper investor reassessment of the U.S. dollar’s role as a safe-haven currency. The divergence between the U.S.–Euro Area 10-year yield spread and the weakening dollar suggests eroding confidence in U.S. economic governance, driven by fears over ballooning fiscal deficits, politically charged tax cuts, and mounting speculation about Federal Reserve independence. As the dollar’s credibility erodes, capital is rotating toward the euro, buoyed by the perception of greater institutional discipline in Europe—even as a stronger euro threatens export competitiveness, particularly in the face of escalating U.S. trade protectionism. However, a stronger euro may temporarily ease inflationary pressures by reducing import costs, it simultaneously undermines export competitiveness—a growing concern that could be further exacerbated by U.S. trade tariff policies.
Source: Eurostat, FRED
Russia
Russia’s economy, still exhibiting signs of overheating due to robust defense-related activity, is now firmly in stagflation, with clear signs of structural strain emerging across the broader economy. In the first quarter, civilian sectors such as transport and trade stagnated, underscoring the uneven nature of growth. Falling oil prices—driven by global economic uncertainty, weak demand signals from China, and the looming threat of U.S. import tariffs—have put downward pressure on Russia’s critical export revenues, amplifying concerns about the sustainability of its wartime expansion. Simultaneously, the labor market remains extremely tight, with chronic shortages intensifying as both private firms and the state compete for limited human capital.
Financial markets briefly rallied on hopes for a swift resolution to the Ukraine conflict, but this optimism proved short-lived; the MOEX index corrected as investors reassessed the enduring nature of geopolitical and macroeconomic risks. The ruble has so far remained resilient, appreciating steadily, but its stability faces renewed headwinds as oil price volatility reintroduces uncertainty. Beneath the surface, the broader picture is shaped by anemic external demand—particularly from China—where concerns over a slowing industrial sector and fragile domestic consumption are contributing to a global drag on oil demand. This soft demand backdrop adds another layer of vulnerability to Russia’s commodity-dependent economy, threatening to erode its fiscal buffers and exposing deeper structural imbalances.
Source: investing.com
China
China’s economy has outperformed expectations, with resilient growth driven largely by a front-loaded surge in exports ahead of anticipated U.S. tariff hikes, as firms rushed to ship goods before trade barriers intensified. However, persistent weakness in the property market has eroded household wealth, undermining consumer confidence. To revitalize the economy, Chinese policymakers have introduced a comprehensive "special action plan" aimed at boosting consumer spending and restoring domestic demand. China’s 10-year bond yield, which had briefly climbed on the back of fiscal stimulus, has fallen back to around 1.6%, reflecting renewed concerns over trade tensions, softening global demand, and the risk of deflation. Investor sentiment remains fragile, and uncertainty surrounding the external environment continues to weigh heavily on outlooks. The yuan, which historically weakens during U.S.-China trade flare-ups, has yet to fully adjust to the current tariff shock—underscoring the broader risks of a prolonged trade war that threatens to entrench economic stagnation and disrupt the fragile balance between domestic stimulus and external headwinds.
Source: National Bureau of Statistics of China