The extent of balance and trust can determine the distribution of income across populations.
Several key indicators can show how balance and trust affect economic outcomes.
A global system of full economic integration—the aspiration of decades of negotiations and the worldwide underpinning of corporate strategy—has never been fully realized. The latest round of global trade talks sputtered to an inconclusive end in the early 2010s. But even as views on the benefits and fairness of the system diverged among countries, there was no overt challenge to the framework of global trade. That changed on April 2, 2025, when US tariff announcements revealed in stark fashion some of the underlying discontent with this construct.
In the weeks since the announcements, share prices and the US Treasury market have gyrated. Expectations of US inflation have spiked. Consumer confidence has plummeted back to lows last seen in 2022, as inflation surged after the COVID-19 pandemic. In the first quarter, the US economy shrank by 0.3 percent, as companies pulled forward imports and inventories grew. Many analysts have raised their estimates of the probability of a global recession. After two years of nearly 3 percent real GDP growth, is the momentum in the US economy strong enough to work through these headwinds?
In our view, the history that led to this volatile moment is important but not as important as what comes next. Many will agree that global and local economies need to find a new balance: a United States that produces more of what it consumes, a China that consumes more of what it produces, a Europe that is competitive and can grow, and a “global south” that connects with advanced economies and finds its path to prosperity. To achieve these outcomes, leaders of business, government, and society can extend their attention beyond today’s trade and budget deficit debates to ask what they can do to get the global economy on the path to achieve this goal.
In that sense, the question now isn’t whether the current path of escalating tariffs and trade tensions is the right one. More critically, the question is whether the path that leaders choose next will further erode trust among countries and within societies, or will the path begin to rebuild that trust? Will leaders choose to continue down a seemingly unsustainable path? Or will they choose to balance economic resilience and national security needs? Economies need stable and secure investment environments to grow and prosper. They also need reliable partners. Economies without balance and trust can’t thrive (Exhibit 1). The extent of balance and trust can determine the distribution of income across populations. Several key indicators can show how balance and trust affect economic outcomes.
That’s our focus. We consider questions such as: What are the balance- and trust-based dynamics of a thriving global economy, what is the relevant context, and what are the five global scenarios for future growth that we believe can help people navigate the path forward? We offer some signposts that CEOs and others can use to see which scenario might be unfolding.
Balance and trust to thrive
There are many ways to describe a thriving market economy, but at its best, it’s a system that seeks a balance between freedom and fairness, deficits and surpluses, and the distribution of production and consumption. It extends opportunity to all, fosters innovation, protects choice, and rewards effort. By prioritizing trust, instilling confidence, and encouraging long-term investment, it drives sustained productivity growth and rising living standards while avoiding negative externalities.
How does balance affect the ability of an economy to thrive? External balance reflects healthy domestic production and trade. Internal balance signals sustainable fiscal policies. Household balance indicates sound saving, debt management, and human capital investment. Corporate balance reflects long-term orientation to the effective allocation of wages, distributed profits, and retained earnings needed for investment. Balance also entails resilience and security. Resilience requires domestic production or reliable access to essential goods, such as pharmaceuticals. Security relies on the capacity to procure or produce the critical goods and services needed to deter external threats and support allies. Lack of balance risks financial instability and degrades the capacity to invest in the human and physical capital required to drive innovation, productivity, and growth.
How does trust affect the ability of an economy to thrive? In higher-trust environments, the risk premium required to do business falls. Information flows more freely. Transaction and monitoring costs decline with transparent legal and enforcement frameworks. Trust can unleash the energy, entrepreneurship, and innovation that fuel a thriving economy (Exhibit 2). In contrast, thriving in lower-trust environments often requires more deliberate, explicit, and potentially coercive use of enforcement mechanisms. This adds friction and transaction costs, promotes less-scalable forms of business (for example, familial- or community-based organization of business), and reduces potential.
What might a balanced, higher-trust global economy evolve into in 2025 and beyond? Thriving might look like this:
- a United States that produces more of what it consumes, reins in deficits, restores long-term fiscal stability, revitalizes strategic industries, and drives growth in a way that lifts the middle class
- a China that consumes more of what it produces and successfully completes its long-sought transition from an economy driven by exports and fixed investment to one powered by rising demand from domestic households
- a Europe that reignites competitiveness through bold investment, accelerated R&D, and capital market and regulatory reforms that unlock the productivity required to sustain growth across the continent and bolster trade
- a global south that deepens integration with advanced economies through strengthened institutions and expanding flows of capital, ideas, and people
Individually, these steps matter. But together, they would be transformative. They would offer the possibility of renewing global trust, restoring balance, and building the foundations of a more prosperous world. Few will disagree with the goal. What will be contentious are the choices that leaders must take and the compromises involved to set the world on this journey.
How did the world get here?
Trust across the global economy has been faltering for some time, and pressures have been building. In fact, trust has never quite reached the levels required for a truly thriving global economy. After the Cold War, there were hopes for a deeper trust-based system. The recipe of the late 1990s and 2000s did set the stage for breakout growth in China and other countries. It advanced global economic integration, lifted billions out of poverty, and improved the living standards of hundreds of millions of Western consumers. It also came with many consequences that were ignored, minimized, or simply missed along the way.
For one, much of the world’s capacity in critical industries became concentrated in a single country: China. This “China shock” happened so quickly that many communities couldn’t adapt. The critical transition from local industry to global integration was—and still is—painful. The growth of low- and high-paying jobs in Europe and the United States accelerated while the middle dropped out (Exhibit 3). Income inequality rose, electorates polarized, and societal trust deteriorated.
The stability of the economy in the decade following the 2008 global financial crisis also left much to be desired. On the global balance sheet— the accounting of the world’s assets and liabilities—every $1.00 in investment was outmatched by $1.90 in new debt. China continued to accelerate its manufacturing dominance, Europe slogged through a lost decade, and the amount of US national income captured by business profits continued to increase, while employment and wages failed to keep pace (Exhibit 4).
Starting around 2017, the geometry of trade also started shifting. Geopolitical distance (the degree of geopolitical alignment) among trade partners started to compress for many countries, signaling deterioration of cross-border trust. Then came the shocks of the COVID-19 pandemic and Russia’s invasion of Ukraine that amplified many ongoing trends (such as digitization) and revealed the vulnerability that had developed through global integration. All this left the global economy with economic and security challenges that businesses and governments continue to grapple with today.
On April 2, 2025, the United States announced tariffs that would be the highest in 100 years. Economic-policy uncertainty and inflation expectations approached or exceeded their highest points in the past 25 years, and consumer confidence approached its lowest point (Exhibit 5).
Scenarios for a transition to a new era
Business leaders can’t, of course, change the macroeconomic environment. What they can do is seek to understand the range of plausible outcomes of the new dynamics in the global economy and identify decisions to take in advance or contingent on how uncertainty resolves.
To help focus on these decisions, we have developed five macroeconomic scenarios that seek to bound today’s highly uncertain environment. Two routes lead to higher trust, better balance, and a thriving economy, albeit along very different courses. Two move sideways—not forward—delivering flat outcomes and trust that fails to rebuild. One is decidedly challenging—a journey that lowers trust, exacerbates imbalances, and reduces potential.
The starting point for these scenarios is the trade rules as of April 11, 2025, keyed to the dramatic shifts in US policy and reactions from China and Europe. The impact of trade-weighted tariffs on US imports is unprecedented but less foreboding than headline announcements, particularly in the medium and longer terms as the scenarios evolve (Exhibit 6). No doubt, the dynamics will shift in unanticipated ways in the next weeks and months. We will update these scenarios as we learn more.
Two routes to higher trust and a thriving economy
The productivity acceleration and US fiscal-reset scenarios would likely deliver the most positive outcomes for the global economy. At the same time, they will be the most challenging to achieve. In the near term, economic headwinds will likely make a direct jump to the productivity acceleration scenario difficult to achieve. Similarly, the US fiscal-reset scenario will require deficit reduction of approximately $1 trillion annually—an adjustment well beyond the proposals on the table at the time of this writing. Nevertheless, the outcomes envisioned in both scenarios set the medium- and long-term aspirations for growth:
- Productivity acceleration. The steps required for better balance and increased trust are initiated. China and the United States deescalate tensions, reducing tariffs to 30 percent in 2025 and then 10 percent in 2026, aligning with most global trade. (In this and all scenarios, tariffs rates are projections and are not the stated intent of government.) China, Europe, and the United States take measures to narrow fiscal gaps; growth helps alleviate the deficits. Trade imbalances narrow as the United States revitalizes strategic manufacturing and China promotes domestic consumption. Debt burdens are relieved as the productivity-driven expansion lifts incomes and renews confidence in the global economic system.1 Growth surges late in 2025 and gains momentum, averaging about 3.5 percent globally beyond 2028.
- US fiscal reset. Similar to productivity acceleration, the new US administration prioritizes restoring fiscal and trade balances as essential to long-term growth and national security. The difference is the major push to rapidly reduce federal spending. In partnership with the US Congress, the administration enacts $1 trillion in annual spending cuts and tax reforms, lowering the deficit to 3 percent of GDP by 2028. The rapid adjustment triggers a US recession in 2025 and slows growth across advanced economies. Inflation and interest rates fall, but with its fiscal house in order, US growth rebounds by 2026. With complementary, growth-oriented policies in China and the eurozone, global growth stabilizes near 3 percent annually after 2028.
Two sideways moves
The no-real-disruption and central-banks-tighten scenarios picture a global economy that will muddle through the situation without material shifts in economic, security, and societal outcomes. Fiscal balances and trade patterns will remain unsettled as countries position for advantage:
- No real disruption. The global economy manages through uncertainty as the policy shifts of April 2025 turn out to be less consequential than feared. China–US tariffs are negotiated down to 30 percent by late 2025; other bilateral tariffs stabilize at a 10 percent floor (again, these are projections, not a statement of government intent). Inflation rises only modestly in the very-near term. Despite the efforts of the Department of Government Efficiency, US deficits stay high, with only modest spending cuts. Europe delivers new defense commitments, but its economic momentum remains weak. Inflation returns to target, and ten-year yields in the eurozone and United States range between 3.0 and 4.0 percent. Global growth settles at around 2.5 percent annually. Trust remains fractured, imbalances persist, and the world drifts sideways without meaningful coordination or renewal.
- Central banks tighten. The tariff levels assumed in this scenario are the same as in no real disruption. But in this scenario, the tariff shock reignites inflation—which rises to nearly 5 percent—forcing central banks to reverse course. Starting in June 2026, they hike rates by over 100 basis points. Growth contracts in the eurozone and United States fall more than 2 percent from peak to trough. China’s growth stalls to around 1 percent in 2027. Global growth remains low at about 2 percent annually after 2028, and trust remains elusive. Internal and external imbalances are not resolved. Without coordination or reform, the world drifts sideways.
A route that challenges trust and the ability to thrive
The geopolitical-escalation scenario entails a downside outcome for the global economy with the forces of secular stagnation constraining the ability of countries to achieve desirable economic, security, and societal outcomes. The geopolitical distance of trade will decrease as countries look to limited blocs of like-minded countries for support.
Global tensions escalate. Trust erodes within and across countries. This scenario assumes that the United States locks in tariffs at April 2, 2025, levels for most countries, and tariffs on China imports remain at 145 percent as announced on April 9. China sticks to a 125 percent rate on US goods. Other markets retaliate one for one. (As noted earlier, governments have not stated their final intentions on tariff levels.) Trade barriers become permanent. Prices spike approximately 5 percent, but central banks look past this. Consumers don’t, however, and demand collapses, triggering a global recession. With no new frameworks for cooperation, fragmentation hardens, geopolitical fault lines deepen, and global institutions falter. Growth turns negative through 2026, recovers slowly in 2027, and settles at just 1.6 percent annually after 2028.
If tariffs cause a build-up of inflation, central banks could respond aggressively, and this scenario could play out differently in the short term. Asset prices could fall more dramatically, triggering a deep recession, large losses in wealth, and a prolonged period of deleveraging that ultimately brings asset values relative to GDP back toward long-term historical norms. Long-term growth is similar.
Exhibit 7 maps the economic effects of all five scenarios for 21 large economies.
Signposts on the journey
How can individuals and businesses gauge if the global economy is headed for a productivity acceleration? What will indicate the opposite? Evidence of emerging trends can shine a light on the future, informing corporate strategy decisions. We see five such signposts for business leaders to keep an eye on:
- Trade frictions decrease, with remaining trade barriers focused on resiliency or national security. New trade agreements, especially multilateral pacts, signal greater trust and facilitate the flow of goods and services, boosting the efficiency of supply chains. At the same time, national-security and resiliency safeguards are important elements for national stability. A new mix of trade policies that provide greater certainty and economic efficiency than historical policies while balancing resiliency and security concerns can provide an optimal environment for business investment, and thus productivity. On the flip side, an escalatory spiral of trade barriers, including nontariff ones (domestic policies affecting international business), can reduce trust and brew uncertainty. Business leaders should be on the lookout for expanded trade agreements (for example, growth of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership membership) and decreased trade barriers, except those that address resiliency or national-security concerns.
- Inflation appears bounded, supported by central bank action. Low inflation is a critical element of stability and future prosperity. High and growing inflation can reduce real values of wealth, hinder household confidence, and make it harder for businesses to plan. Central banks typically have a target rate of inflation. To meet the target, they often raise overnight borrowing rates as a primary policy tool (ultimately growing the cost of capital for business). If tariffs remain at announced levels (or even increase over them), prices may tick upward.2 Central banks may discount inflationary pressure as transitory, as the US Federal Reserve did during the COVID-19 pandemic. Yet ultimately central banks may intervene if tariff-induced cost pressure persists. Executives should monitor actual and expected inflation, and how central banks respond.
- Consumer sentiment rebounds with continued spending in the United States and increased spending in China and Europe. US consumers have continued spending even when polls suggest that they’re uneasy about the economy, buoying it over the past couple of years. Yet consumer sentiment is still a canary in the coal mine. Today, US consumer sentiment is near all-time lows. A reversal of this could stimulate greater spending, promoting future growth. Business leaders should also look at consumer spending in China and Europe, where a substantial uptick will foster economic rebalancing (in China) and encourage higher business investment (in Europe).
- Business investment plans move forward, and foreign direct investment flows accordingly. Business investment is a primary driver of future productivity growth. High uncertainty and unmoored inflation may compel businesses to change their plans by reducing or rerouting investment, including foreign direct investment. For now, business investment in the United States remains robust despite uncertainty and inflation. Executives should watch the US administration’s effort to encourage more investment through both regulatory reform and (potentially) deals linked to tariff concessions.3 In China, business leaders should note whether corporate investment continues to grow and, of equal importance, whether domestic demand can catch up. In Europe, executives should monitor recent commitments to defense spending, which may serve as the injection needed to waken the region from its sluggishness over the past decade.
- Capital flows to businesses through functioning credit markets and resurgent equity issuance. To make investments, including launching new businesses, firms need accessible funding at predictable costs. Volatility in global bond markets can drive interest rates higher, making capital more expensive. Higher risk (as seen, for example, in equity market turbulence) may reduce investors’ willingness to lend or buy equities, making capital scarcer. Executives should watch to see if volatility subsides and deal flows tick up for banks and private capital, which would signal that capital providers are funding future growth.
Many CEOs and top teams have launched some kind of nerve center to understand their exposure to shifting tariffs, economic policies, and national-security priorities. This is the right first step. We also believe that management teams need to use this structure to build a complementary perspective: exploring opportunities. That work starts by focusing a “microscope” on the current moment, using scenarios and event analysis to test what might unfold over the next six to 18 months. Companies should be asking what actions to take and options to buy in the moment. A second effort concentrates on peering through a “telescope” to survey the range of opportunities and challenges created by the range of probable economic outcomes ahead. In this work, companies should be asking what strategic moves are needed to succeed in these new environments. This second step is what differentiates market winners.
