NextFin news, The Bank for International Settlements (BIS), headquartered in Basel, Switzerland, issued a report on Monday warning that the ongoing U.S. tariffs are likely to cause stagflationary effects, with the U.S. economy facing the most significant impact in terms of slower growth and higher inflation.
The BIS economists highlighted that while the global economy initially showed resilience due to front-loaded trade and easing financial conditions, the sustained higher tariffs imposed primarily by the U.S. will increasingly weigh on global economic growth and contribute to inflationary pressures.
The report noted that average U.S. tariffs are expected to remain at historically high levels, which will act as a drag on economic activity. The tariffs have already begun to affect corporate earnings in manufacturing sectors and have contributed to weaker private spending and a softening labor market in the U.S.
According to the BIS, countries imposing tariffs face a stagflationary shock as import prices rise, depressing real income and demand, while countries targeted by tariffs experience lower export demand and growth. Canada and Mexico are also at risk of significant stagflationary effects following the U.S.
The BIS cautioned that ongoing trade policy uncertainty could further depress domestic demand and threaten global growth. Additionally, the inflationary impact of tariffs varies by country, with the U.S. likely to experience higher import prices and inflation, while other countries might see mixed effects due to currency appreciation and trade diversion.
The report also warned of financial market vulnerabilities, noting that investor risk appetite could decline as tariff effects become clearer, potentially leading to tighter financial conditions and market corrections.
Furthermore, the BIS highlighted risks related to the depreciation of the U.S. dollar, which could exacerbate inflation in the U.S. and disinflation elsewhere, while also challenging the dollar's status as a global safe haven currency.
In its annual economic review, the BIS criticized the use of tariffs as an ineffective tool for addressing trade imbalances and urged the U.S. to focus on reducing its fiscal deficit instead. The report emphasized that tariffs often increase costs and depress local economic activity rather than boosting domestic production.
The BIS managing director, Agustin Carstens, stressed that if inflation expectations become unanchored, central banks must respond forcefully, even if it risks pushing economies into recession.
This report comes amid broader concerns about long-term global economic challenges, including slowing productivity growth, aging populations, high public debt, and financial system vulnerabilities, all of which compound the risks posed by trade disruptions.
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