Global Economy Risk Assessment
Oil, Tariffs, and Tensions: Navigating the Knife-Edge of the Global Economy
By The Better Policy Project | June 26, 2025
A Fragile Calm in a Volatile World
Macroeconomic uncertainty is deepening as geopolitical instability, persistent stagflationary pressures, and unresolved global policy risks reshape the outlook for growth and inflation. The Better Policy Project’s June 2025 Global Economic Risk Assessment examines the economic ramifications of the Iran-Israel conflict, where a tentative ceasefire has provided only temporary relief to global oil markets. While the baseline growth forecast remains largely intact, the potential for prolonged oil supply shocks, rising U.S. inflation, and fragile investor confidence looms large. This month’s report presents a new set of scenarios focused on geopolitical risk and energy market volatility, while maintaining attention on trade tensions, fiscal dynamics, and global policy uncertainty. 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 One Big Beautiful Bill passed the House. It will likely add about 1pp to an already large deficit of 6% of GDP. The bill puts the US on the wrong path towards debt sustainability and puts the economy in a more vulnerable position to a possible crisis in confidence in the US economic agenda.
The US policy shift towards tariffs, tax cuts, and immigration restrictions all point in an inflationary direction, all together and all at once could be the beginning of a new inflation wave.
Equity prices have rebounded since Liberation Day and are nearing new highs. The rapid rise in equity prices during the pandemic has contributed to the resilience among consumers. New equity price highs mean more consumption, less saving, supporting higher demand.
New fiscal packages from the next two biggest economies in the world (Germany and China) have the potential to boost global growth.
The UK and Japan are seeing signs of core inflation accelerating. If the source of these pressures is explained by a loss in central bank credibility, then the BoE and BoJ may need to tighten monetary policy amid low growth.
Inflationary pressures in Russia, coming from tight labor markets and rise of domestic demand.
Geopolitical tensions in the Middle East, Iran sanctions or a shutdown of the Strait of Hormuz could lower global oil supply substantially and put upward pressure on oil prices.
Lower Interest Rate Risks
The combination of high public debt, high equity prices, and years of above target inflation put the US economy in a very vulnerable position to a new set of shocks. Any number of inflationary risks presented could turn into disinflation if it were to lead to a crisis in confidence in the US economic agenda.
The resumption of Liberation Day tariffs after the 90-day pause could slow global trade enough to bring the global economy into a more severe growth recession
The US fiscal situation could lead to debt sustainability concerns and ultimately more serious fiscal consolidation that aims to bring the deficit to GDP ratio to 3%.
Given high equity valuations, financial markets are more prone to change in sentiment, say towards the US economic agenda that could send equity prices to nosedive and generate a financial markets driven recession.
Consumers could also lose confidence due to the high levels of uncertainty leading to precautionary saving or a consumer demand driven slow down.
China’s property market remains a problem that needs to be monitored since China’s demographic problem should only be getting worse not better lowering the demand for housing.
Concerns over weak demand in China combined with economic uncertainties, are adding downward pressure on global oil demand.
What Changed in June?
The global growth outlook remains largely unchanged, but the risk of stagflation persists, driven in part by trade tensions resulting from U.S. tariff policies. The risks surrounding the June update are considerable, with the global economy still teetering on the edge. U.S. policies on tariffs, immigration, and fiscal matters are expected to continue creating short-term inflationary pressures that may ultimately turn deflationary. Next month, the release of the U.S. Consumer Price Index (CPI) for June is highly anticipated. Should this data come in significantly above market expectations, reflecting strong tariff pass-through, combined with concerns about the nation’s fiscal trajectory and potential labor shortages from strict immigration policies, it could undermine confidence in the U.S. economic agenda, precipitating a crisis.
Global Economy
The conflict in the Middle East is yet another source of uncertainty for the global economy that was already dealing with several issues that were largely stagflationary in nature and based on changes in US economic policy i.e. tariffs, immigration, fiscal policy. In this edition, we chose to focus on different outlooks for oil prices depending on the severity and persistence of the Israel-Iran conflict. A tentative ceasefire was declared by President Trump on June 23 and oil prices quickly treated lower to its pre-conflict level. However, the situation cannot be considered stable given the numerous hints of “regime change” and reactions by Iran’s allies like Russia to continue to support Iran’s nuclear ambitions.
Source: Fred
Global economic uncertainty is largely driven by uncertain US tariff policy. Lack of progress in trade negotiations raises the possibility of higher tariffs once the 90-day pause deadline is reached. Furthermore, some industries have been identified as possible tariff targets to come later in the year.
Source: Adapted from a PIIE Tariff Timeline
Oil Market
The June GERA introduces two oil-related risk scenarios: a temporary price spike from Iran-Israel tensions and a persistent supply shock removing 2 million barrels/day due to sanctions. While the short-term impact may be contained, a prolonged disruption could sharply raise global oil prices and intensify stagflationary pressures across major economies.
Source: EIA, BPP
The chart above illustrates these dynamics. While earlier shocks in 2019 were absorbed by surging U.S. shale production, that buffer is fading. As the U.S. shale industry enters its twilight phase, the market is more vulnerable to long-term supply shocks—tightening global energy markets and amplifying inflationary risks across major economies.
U.S. Economy
Despite sticky price inflation showing some moderation, it remains elevated which makes the economy more vulnerable to another inflationary wave. If an inflation premium exists ahead of a tariff-type inflation shock, then the pass-through could be quicker and second-round effects larger. Furthermore, a restrictive migration policy threatens to tighten the labor market, thereby putting pressure on wages that are also above the level that would be consistent with the inflation target. It is four straight months now where the Southern border has been effectively shut down. It looks increasingly likely that the foreign-born labor force will begin to see an outright decline soon. We should be attentive to labor bottlenecks forming in foreign-born dominated sectors as a key ingredient of whether a new inflationary wave will materialize.
Source: U.S. Customs and Border Protection
Euro Area
Headline inflation continues to register around its 2․0% target, with services inflation declining but still elevated. While wage inflation has seen some signs of cooling, a 4.1% wage growth would still be above what is considered consistent with the inflation target. Coupled with an unemployment rate that remains at a historic low of 6.2% may suggest that wage disinflation hits a snag is tight labor market conditions take hold going forward. The ECB remains in a delicate balancing act, aiming to support a recovery in real economic activity while addressing inflationary pressures in different pockets of the bloc.
Source: Eurostat, FRED, BPP estimates
Russia
In mid-2025, Russia's economy is showing clear signs of slowdown after a period of war-driven growth, with much of its activity increasingly concentrated in defense industries. A key vulnerability lies in oil and gas revenues, which remain highly sensitive to global market shifts. Following a steep drop to their lowest point since early 2023, oil revenues have seen a modest rebound in June, aided by rising Brent prices amid escalating tensions in the Middle East. This temporary lift, however, masks deeper risks. Potential U.S. import tariffs and ongoing geopolitical uncertainty could weigh heavily on global oil demand, limiting Russia’s revenue gains. While a further escalation involving Iran and Israel could disrupt energy supply routes and momentarily boost prices, the associated sanctions risks and investor wariness could tighten Russia’s financial conditions. The ruble’s future, and broader macroeconomic stability, will hinge on how these oil-linked external pressures evolve
Source: FRED
China
China's economy began 2025 with stronger-than-expected growth, driven by industrial production and fixed-asset investment, but remains exposed to significant oil-related vulnerabilities. A key concern is its dependence on Iranian oil, with an estimated 1.8 million barrels per day, about 16% of China’s total crude imports, at risk if the Strait of Hormuz were disrupted due to the Iran-Israel conflict. Such a shock would severely affect China’s industrial sector, potentially halting production for some manufacturers and triggering ripple effects across global supply chains. While expansionary fiscal policy and a temporary truce in the U.S.-China tariff dispute have supported market optimism, the looming end of the 90-day pause in August adds uncertainty. If tariffs resume amid an oil supply disruption, China’s fragile consumer sentiment and vulnerable property sector could face renewed strain, compounding external shocks and complicating the government’s economic balancing act
Source: National Bureau of Statistics of China
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