Global economy: Resilience amid policy shifts and trade tensions

It’s been roughly a year since the U.S. administration took office, and foundational elements of global economic, political and security policy have been altered or replaced. Despite the uncertainty, the global economy has endured, sidestepping the dire predictions that marked the start of last year. Growth has stabilized, and trade continues—albeit distorted by new policy measures. While encouraging, these shifts are reshaping the global economic landscape in real time.

In our latest economic forecast, we’ve revised growth prospects slightly upward: Global gross domestic product (GDP) is projected to grow by 3.1% in 2026 and 3.2% in 2027, following expected growth of 3% in 2025. This is an improvement from our previous outlook, but still below potential and underperforming the 45-year average.

How trade barriers and policy volatility are reshaping the global economy

Tariffs and persistent trade uncertainty have become entrenched challenges for businesses and the global economy. With policy positions hardening amid geopolitical insecurities and supply chains adapting, barriers to trade are expected to persist throughout our forecast horizon.

For the U.S., tariff revenues are increasingly viewed as a partial offset to ongoing fiscal pressures. With the Congressional Budget Office projecting a federal budget deficit averaging 5.6% over the next five years, any administration will find it difficult to abandon this policy tool. We expect the average effective U.S. tariff rate to exceed 10% for most countries through the forecast period—well above the 2% rate at the start of 2025.

Since our first-quarter Global Economic Outlook (GEO) incorporates developments up to Dec. 5, 2025, data gaps from the extended government shutdown have obscured the outlook for the U.S. economy, but EDC Economics believes momentum persists despite a softening labour market. Layoffs aren’t signalling a turning of the economic cycle and unemployment remains contained. Business investment—concentrated in infrastructure and data centre technology—has provided a lift. Additionally, tax and spending provisions will fully kick in this year, with retroactive tax breaks and rebates. Together with a more accommodative monetary policy, these factors should help support demand.

Lingering questions remain around non-tech capital spending and whether inflationary pressures continue to erode real earnings. The disconnect between benign economic data and historically weak consumer sentiment is notable ahead of midterm congressional elections. With consumers driving nearly 70% of the U.S. economy, confidence matters. We forecast U.S. growth of 2% in 2026 and 2.1% in 2027.

Sustained growth alongside above-target inflation, even as the labour market slows, poses a challenge for the U.S. Federal Reserve. For the first time in more than three decades, multiple Federal Open Market Committee (FOMC) members have opposed policy decisions, creating uncertainty. Following December’s cut, we anticipate two additional quarter-point rate cuts in the second half of 2026.

Canada, Europe and China: Diverging paths in a volatile global environment

Canada weathered the tariff shocks better than expected. After job losses pushed the unemployment rate to 7.1% through September, the labour market rebounded, and consumer spending held firm. Business investment remains weak but shows early signs of improvement, aided by policy and tax adjustments. Despite lingering uncertainty, and ongoing pressures on the trade side, we forecast Canadian growth of 1.2% in 2026 and 2.5% in 2027.

Inflation in Canada will fluctuate due to policy changes—such as the 2025 GST/HST holiday and carbon tax removal—rather than underlying price pressures. The Bank of Canada is expected to hold rates steady in 2026 before gradually normalizing in 2027. With Fed easing expected to continue, this should support the Canadian dollar, though volatility is expected ahead of the Canada-United States-Mexico Agreement (CUSMA) review. We forecast the loonie to average US$0.72 in 2026 and US$0.74 in 2027.

The Euro Area continues to face significant uncertainty, despite an August 2025 agreement to stabilize U.S. tariff rates. Some of this unpredictability reflects the volatile trade environment, including a surge in Chinese imports. In France, failure to secure approval for the government’s fiscal and reform policies continues to undermine the business environment. Germany, which passed an historic financing plan last spring, also faces questions around implementation. While we expect these issues to be resolved, the current environment will result in growth of just 1% in 2026 and 1.4% in 2027 for the bloc.

China’s economic outlook reflects a strong export sector and weak domestic demand. Despite U.S. trade barriers, China posted a record US$1.1-trillion trade surplus through November 2025, reorienting exports to Europe, Africa and Southeast Asia. While highlighting the competitiveness of Chinese exports, that net exports accounted for nearly one-third of economic growth last year underscores the country’s vulnerability to trade actions from other partners. Domestic demand remains sluggish amid oversupply and deflationary pressures. We forecast Chinese growth of 4.3% in 2026 and 4.6% in 2027.

The bottom line: Key global risks and strategic priorities for 2026 and beyond

The global economy has entered its weakest three-year stretch in decades, as U.S. policy shifts reverberate worldwide, trade tensions persist and political uncertainty clouds once-stable markets. While resilience remains, growth is slowing, inflation challenges linger and volatility is here to stay. Businesses and policy-makers must brace for a period defined by fragility, adaptation and strategic recalibration.

Explore EDC’s Global Economic Outlook and Country Risk Quarterly for strategies to manage risk and navigate global trade uncertainty.

This week, a very special thanks to Ross Prusakowski, deputy chief economist and director of our Country & Sector Intelligence team.

As always, at EDC Economics, we value your feedback. If you have ideas for topics that you’d like us to explore, please email us at economics@edc.ca and we’ll do our best to cover them.