SEB Nordic Outlook: Uncertainty Is the New Normal for Economic Growth
The established order in international trade and economics, which is based on predictable, transparent and rule-based principles, is in a state of upheaval. Tariffs, geopolitics and the surrounding uncertainty are influencing sentiment, forecasts and the financial markets. Political uncertainty also dominates the economic forecasting environment. Initiatives and decisions from the White House have led to an unusually uncertain situation and a confrontation in global economic policy. It is clear that there will be no winners in a trade war, and the longer it lasts, the higher the costs will be.
Global growth prospects are deteriorating in the major economies, particularly in the United States and China. The impact on the eurozone will be more limited. Due to tariffs, the overall adjustment to our GDP forecast for 2025–2026 is around 1.5 percentage points.
- United States – from 2.4% in 2025 and 1.9% in 2026 to slightly above 1% in both years;
- China – from 4.5% and 4.3%, to 4.2% and 4%, respectively;
- Eurozone – down by one-tenth of a percentage point, to 1% growth this year and 1.2% next year.
Global GDP growth – is expected to be slightly below 3% p.a. in 2025-2026, which is relatively low from a historical perspective. Growth in the United States has slowed sharply this year and is on the verge of a recession. China is unlikely to reach its politically set growth target of 5 and may even grow more slowly than official statistics suggest. The eurozone is expected to perform better - mainly thanks to fiscal stimulus measures in Germany.
Tariffs cannot solve the problems in the U.S. economy
It is clear that the United States will not avoid economic and financial setbacks. The US trade deficit problem is much more complex and cannot be solved by tariffs alone. Stock markets have fallen, fixed income markets are destabilised and indicators such as the VIX volatility index have risen sharply. Confidence in the US economy has been shaken. This is also reflected in the fact that the dollar has fallen to its lowest level in three years despite higher Treasury yields. We expect the financial markets to remain volatile, the dollar to weaken and central banks to cut interest rates further. If the right measures are taken, the EU could emerge as a relative beneficiary in this environment.
For US President Donald Trump, tariffs have become a multifunctional instrument: On the one hand, they are intended to curb immigration, trade and the influx of drugs; on the other, they are designed to increase federal revenue and encourage the relocation of production to the US. The average tariff rate on US imports is currently just under 30%. Tariffs have not been this high for over a century, even if the effective rates are somewhat lower. The so-called “reciprocal” tariffs and the extreme tariffs imposed by the US on China make trade virtually impossible. Given global specialisation, such an approach is not sustainable in the long term, unless the real goal is a comprehensive embargo. We assume that a general US import tariff of 10% will largely remain in place. In some sectors, tariffs will be higher (up to 25%), but again, exceptions are likely. Some countries, particularly China, will face a higher tariff burden.
Investment planning will continue to be hampered by long-term uncertainty. Trading systems will be reorganised, competition will decrease and innovation will slow down. For companies, the focus will shift from building more efficient production to minimising tariffs. A major challenge will be the negotiation of trade agreements during the 90-day tariff pause. Such processes usually take years. A possible solution for both the US and China could be to gradually exempt certain goods from tariffs - an approach that could pave the way for a final agreement.
Model-based analyses by the International Monetary Fund (IMF) and the Kiel Institute clearly show that the US and China will suffer the most. This is probably the reason why many countries have decided not to respond with retaliatory tariffs. As negotiations progress, a lower overall level of tariffs than at present could be achieved.
The trade war is also dampening the recovery in consumer spending, as concerns about the economic outlook have weakened consumer confidence. However, some positive factors remain. Inflation and interest rates have fallen in many countries, real incomes are rising, savings are high and - labour markets in the US and Europe remain resilient despite some deterioration. Many consumers are expected to increase their spending as uncertainty, interest rates and inflation ease.
The recent period of excellent performance in the US - fuelled by strong growth, a booming stock market and a strong dollar - appears to be over. The economy is slowing due to government policy rather than structural weaknesses. Confidence indicators have weakened, order volumes have fallen and financial uncertainty is putting pressure on households and businesses. Some companies will increase their investments in the US, but the country is no longer seen as an attractive destination for financial investments. Tariffs will push inflation up to 3.5% this year, while the Federal Reserve is expected to ease monetary policy.
Impact of inflation – different effect in the U.S. and Europe
Germany’s decision to relax the “debt brake” and increase investment in infrastructure, together with investment in European security policy, will support the eurozone. The negative impact of tariffs will be felt in both 2025 and 2026, but this will be offset by a more expansionary fiscal policy from 2026. In the battle between the US and China, the European Union could emerge as the winner.
China, which has responded with retaliatory tariffs, is clearly the focus of US policy, both economically and strategically. China will face enormous challenges as the tariffs threaten the role of exports as a driver of growth, while problems in the property market persist and domestic demand remains weak. Moderate currency devaluation and export diversification will help to mitigate the trade shock and partially offset the slowdown.
Trump’s policies include growth-promoting initiatives such as deregulation and some tax cuts. If international negotiations ultimately lead to lower tariffs than currently planned, uncertainty decreases, and European stimulus measures have a greater impact, growth could pleasantly surprise. The situation could also improve if China addresses its structural problems. However, the upside potential is limited. The negative domino effect caused by tariffs and financial market uncertainty could deepen the global downturn.
A dominant factor will be the impact of tariffs on commodity prices - tariffs will lead to significant differences between inflation in the US and the eurozone. Inflation in the Eurozone is expected to reach 2% by mid-year this year as the previous inflationary theme - the pace of wage growth slows. The biggest difference will come from goods inflation, as imports are subject to tariffs. In the worst case scenario, goods inflation in the USA could rise by up to 7%. The US accounts for a large share of global final consumption and is heavily dependent on imported goods in many areas, making it difficult for companies to avoid price increases. In the meantime, the economy will slow down and demand will fall, offsetting these effects somewhat.
Countries that do not impose retaliatory tariffs will not see direct price increases, but may feel a slight downward effect on inflation. As global demand declines, former US imports from China and Southeast Asia will find alternative markets. There are signs that some companies are planning to spread tariff-related cost increases globally, meaning the rest of the world will have to partially compensate for lower profit margins in the U.S. For example, manufacturers might set global prices for consumers.
Interest rate cuts will continue
Monetary policy in the U.S. and Europe has good potential to support growth and labour markets through further interest rate cuts in 2025 and 2026. We expect the Federal Reserve (Fed) to reduce its key interest rate three times this year and another three times in 2026, slightly more than in our previous forecast. Lower inflation and a moderate recovery, alongside downside growth risks, will likely prompt the European Central Bank (ECB) to cut rates three more times this year, bringing them down to 1.5%.
Oil prices are influenced by several factors: weaker demand due to growth concerns, increased production by the OPEC+ cartel, and price cuts by Saudi Arabia. We forecast oil prices around 70 USD per barrel in 2025 and 2026. Natural gas prices have also fallen. Europe’s gas reserves are slightly below their historical average and clearly lower than a year ago. China’s halt on imports of American natural gas provides temporary relief to Europe.
Economic growth expected in the Baltic States
Falling interest rates and continuous real wage growth will support increased consumption in the Baltics. Moreover, the interest rate trend, inflows of European funds, and rapid growth in defense spending will boost investment activity. The biggest risks are linked to U.S. trade policy, which could complicate export growth
Differences in growth among the Baltic countries are influenced by consumer and business confidence, which is affected by global uncertainty. For this reason, Latvia’s GDP growth has been lowered to 1.6% this year and 1.9% next year. Estonia is expected to grow by 1.8% this year, followed by a stronger recovery of 2.8% in 2026. Growth will be held back by tax increases and high inflation. Lithuania is expected to maintain GDP growth of 2.7% this year and 2.5% next year.
Dainis Gašpuitis
Economist, SEB banka
