Twenty twenty-five was a year when everything changed – yet, somehow, nothing did. The US raised tariffs to their highest level in almost a century, China retaliated and global policy uncertainty intensified. And still, global growth is projected at 3.2 per cent, exactly what forecasters expected a year earlier when none of this turbulence was on the horizon.
It would be a mistake, however, to think the global economy is unaffected by tariff fights and policy chaos.
We have seen this movie before. When the Brexit referendum passed, despite the sharp increase in uncertainty, the economic impact was initially minimal. But a decade later, the UK is estimated to have lost between 6 to 8 per cent of gross domestic product (GDP) relative to its pre-Brexit trajectory.
The lesson is simple: structural damage reveals itself slowly, and always too late to be reversed.
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So why hasn’t the world felt the sting of tariffs yet? The answer lies partly in actual tariffs being around half of what the US announced thanks to numerous exemptions.
Yet at 14 per cent this remains a sharp escalation, the consequences of which had two offsets. First, AI spending and the stock market surge powered by artificial intelligence (AI) optimism have propped up US growth and buoyed economies such as Taiwan and South Korea that export AI-related goods.
Second, fiscal policy has been more expansionary, not only in the US, but even more so in Germany and China. These forces masked the drag from American tariffs and Chinese retaliation. They also made 2025 look far more stable than it actually was.
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The global economy is more fragile than headline numbers suggest, starting with the fragility in the AI sector. Investors have finally begun to question the gap between sky-high AI valuations and actual AI returns.
Companies such as Meta, which have signalled large increases in AI spending without corresponding revenue streams, have been punished. And they are not alone. AI companies will soon have to confront a harsh challenge: prompts cost money, which means subscriptions will need to rise. A price of $20 (€17.12) a month won’t cover the prompt-costs or sustain the infrastructure arms race against new challengers.
This is not a statement about AI’s potential, which is in all likelihood transformative. It is a statement about profitability. With competitive pressure both seen and unseen, the risk of a dotcom-style correction is real.
Meanwhile, the celebrated “resilience” to tariffs is deeply misleading. Tariffs have been costly, and especially so for Americans. Roughly 95 per cent of tariff costs have been absorbed by US firms, with only some passed on to consumers. That “some” matters: tariffs alone have added 0.7 percentage points to inflation. Without them, inflation could have been 2 per cent this year – exactly the Federal Reserve’s target. Instead, tariffs have made the typical US household $600 poorer.
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The damage from tariffs will grow more visible in 2026 as the resilience afforded by front-loaded imports fades and companies pass through a higher share of costs to consumers.
China also needs to face up to some uncomfortable truths. Continued reliance on export-led growth is untenable, and Beijing’s new five-year plan, which prioritises allocating resources to technology sectors over shoring up social safety nets and boosting consumption, risks deepening structural imbalances.
Europe, for its part, has played the adult in the room by defending a rules-based global system, but it still needs to pursue internal reforms on its own account. The EU must deepen its single market, raise productivity and position itself as an attractive destination for global capital seeking diversification.
And the US is not helping. Unfriending the European Union – its largest economic partner – is poor economic strategy. While nothing catastrophic happens overnight, Europeans are trying quietly and gradually to decouple from US financial infrastructure, as they question their reliance on Visa and Mastercard. Just a year ago this would have been unthinkable.
The reality is that 2025 was a year when everything changed. The question now is whether 2026 will be the year we correct course. There is an opportunity: the US holds the G20 presidency and France the G7 presidency. Together they can spur action to restore stability to an uncertain and increasingly fragmented global system.
If we fail to act, living standards everywhere will decline and the inward-looking policies that command popular support today will become unpopular. But by then it may be too late. – Copyright The Financial Times Limited 2026
Gita Gopinath is the Gregory and Ania Coffey professor of economics at Harvard University and formerly first deputy managing director and chief economist of the IMF
