In its new baseline forecast, the level of GDP falls by around 0.6 per cent in the United States over the next 12 months and by 2-3 per cent in Canada and Mexico compared with similar forecasts from November last year.
Its new baseline forecasts for China—now incorporating the United States’ additional 10-per cent tariffs on imports from China—are largely unchanged from its November 2024 forecasts.
The economic impact of the 25-per cent tariffs on goods imports from Canada and Mexico (except autos and Canadian oil and gas) will be much smaller for the US than for the former two, S&P Global Ratings thinks.
It said the US-instigated tariffs and trading partner counter-tariffs will lead to across-the-board lower GDP growth, higher unemployment rates and higher inflation.
Reiterating that there are no winners in a trade war, S&P Global Ratings said the US-instigated tariffs and trading partner counter-tariffs will lead to across-the-board lower gross domestic product (GDP) growth, higher unemployment rates and higher inflation.
These effects are larger for relatively smaller and relatively trade-dependent economies. Policy rate outcomes are mixed with emerging markets central banks likely to keep rates higher to keep inflation expectations anchored, the rating agency said in a release.
The new tariffs are likely to temporarily boost US consumer price index (CPI) inflation by 50-70 basis points, as a first approximation. Currency adjustment, product substitution, or cost absorption along the supply chain from the exporter to final consumer offers some price relief, but any relief is probably going to be limited. CPI inflation in the country will likely stay close to 3 per cent across 2025, S&P Global Ratings noted.
Combining the hit to exports, purchasing power of Canadian households, and erosion of investment outlays, S&P Global expects Canada’s GDP to decline by 2.5 per cent in the next 12 months compared with its previous baseline. The reaffirmation of the United States-Mexico-Canada Agreement (USMCA) partially unwinds the negative gap in the second half of 2026.
At the same time, Canadian consumer prices could rise by about 50 basis points above the rating agency’s previous baseline.
Amid such weak macro conditions, the Bank of Canada is likely to cut policy rates more to support the economy—looking through the inflationary impulse as a one-off temporary outcome, it observed.
Overall consumer prices in Canada may rise by 2.7 per cent by the fourth quarter of 2025 compared with 2 per cent in the November baseline.
S&P Global Ratings feels Mexican officials will likely continue to be pragmatic in their negotiations with US officials to lessen the duration of tariffs. However, if tariffs were to stay in place for some time (months or quarters, not weeks), the impact on the Mexican economy would be significant., it said.
Assuming that tariffs are in effect throughout 2025, it estimates Mexico’s GDP would contract by 0.5 per cent this year (1.7 per cent below its pre-tariff baseline). We assume the exchange rate will depreciate by about 10 per cent, which will absorb a large portion of the higher export costs associated with the tariffs. The main drag on the country’s growth will be through lower investment and consumption.
Key will be whether tariffs are seen as a precursor to a material long-term change in the trade relationship between the United States and Mexico, it observed.
The additional 10-per cent US tariffs on China are an obvious negative for China’s growth and will mean lower exports and investment, and other spillover effects.
However, that further drag on growth is offset by two recent developments. First, growth at the end of 2024 was better than expected because of policy support, tentative bottoming out of the property sector, and strong exports. The stronger momentum helps push up 2025 growth.
Second, during the recent National People’s Congress annual session, the government confirmed a relatively ambitious 5-per cent growth target and committed to more fiscal stimulus than S&P Global had expected in November.
The rating agency projects 4.1-per cent GDP growth in 2025—substantially less than the government’s target—and 3.7 per cent in 2026. But it expects less export growth and stronger domestic demand.
Fibre2Fashion News Desk (DS)
