As the global economy stands precariously at the edge of a downturn, the simultaneous eruption of two destabilizing forces—an escalating war in West Asia and a destructive global tariff conflict—now threatens to push it over the brink. While each shock in isolation poses significant downside risks, their convergence amplifies the danger manifold, creating what economists would call a classic double-shock recessionary environment.
The latest International Monetary Fund (IMF) World Economic Outlook paints a grim backdrop. Global GDP growth for 2025 is projected to slow to 2.8%, placing the world economy squarely within what analysts have long described as the “stall-speed zone.” This range, typically between 2.5% and 3% growth, marks a period of heightened vulnerability. History shows that when the global economy enters this threshold, it becomes acutely susceptible to external shocks. Over the past 45 years, every major global recession has occurred when the world economy was operating at or below this stall speed.
The first major blow to global growth has come in the form of an intensifying tariff war. US President Donald Trump’s aggressive protectionist stance, marked by sweeping tariff hikes, is no longer just political rhetoric but hard policy. After months of legal disputes and backchannel negotiations, the emerging tariff package points towards a global average tariff rate of around 10%. This represents an almost five-fold increase from the 1.9% average effective global tariff rate that had prevailed for three decades prior to Trump’s “Liberation Day” announcement in April 2025.
China, unsurprisingly, is bearing the brunt of these new measures. Higher, country-specific tariffs targeting Chinese exports, along with steep product-specific duties on industries like automobiles, steel, and aluminium, are already disrupting global supply chains. For an export-dependent economy like China, these actions translate directly into lower growth, reduced employment, and weakened investor sentiment. The secondary effects will also ricochet back to the United States. With its business sector facing rising input costs and heightened uncertainty about future trade dynamics, American firms are beginning to pull back on capital spending and hiring.
Together, the US and Chinese economies have contributed more than 40% of global GDP growth since 2010. Their simultaneous slowdown, prompted by this tariff escalation, significantly increases the drag on overall global economic momentum. The ripple effects are likely to be felt far beyond their borders—from commodity-exporting nations in Africa and Latin America to European manufacturing hubs heavily integrated into global supply chains.
However, just as the world was grappling with the implications of this trade war, a far more kinetic and unpredictable shock emerged. The conflict between Israel and Iran, long simmering beneath the surface, erupted dramatically into open hostilities following Israel’s airstrikes on Iranian targets on June 13. The United States’ subsequent bombing of Iran’s nuclear enrichment facilities on June 21 marked an unmistakable escalation, pulling Washington directly into the conflict.
Geopolitical risks of this scale inevitably have macroeconomic consequences, and the most immediate channel is through global energy markets. Predictably, oil prices surged following the June airstrikes. However, it’s worth noting that this spike came from a relatively low base. Oil prices had been languishing near three-year lows before the outbreak of hostilities. Even with the post-strike surge, prices remained below the highs seen after the 2022 energy crisis.
Following Trump’s ceasefire announcement on June 23, oil markets retraced much of their earlier gains, signaling tentative optimism. Yet, the respite may prove temporary. Should hostilities resume, or should Iran retaliate by threatening critical oil production sites or vital shipping lanes like the Strait of Hormuz, the world could see another violent upswing in oil prices. The precedent is chilling. In 1990, Saddam Hussein’s invasion of Kuwait resulted in a doubling of oil prices within just three months, tipping an already slowing global economy into recession by 1992.
The parallels with the early 1990s are hard to ignore. Back then, the world economy was similarly slowing towards its stall speed when the Gulf War shock delivered the final push into recession. Today’s situation, however, may be even more precarious given the simultaneous impact of two independent but potentially reinforcing shocks.
The complex geopolitical interplay between the tariff war and the West Asian conflict cannot be overstated. On one hand, rising oil prices would act as an inflationary force, eroding real incomes and purchasing power worldwide. On the other, the tariff war acts as a deflationary drag, choking off trade flows, suppressing investment, and undermining business confidence. Together, these forces generate stagflationary pressures—low growth coupled with rising prices—a scenario that presents nightmarish policy challenges for central banks already struggling with post-pandemic monetary normalization.
Furthermore, this double-shock scenario arrives at a time when the traditional policy arsenal of fiscal and monetary stimulus is largely depleted. After years of ultra-loose monetary policy following the 2008 global financial crisis and the 2020 pandemic, central banks have limited room to cut rates further. Simultaneously, many governments remain fiscally stretched, limiting their capacity to deploy large-scale stimulus packages.
The IMF’s stall-speed warning for 2025 must therefore be viewed not as a statistical artifact but as a loud alarm bell. A growth rate of 2.8% may appear positive at first glance, but history shows that when global output slips below 3%, systemic risks escalate sharply. The global economy then becomes unable to absorb additional shocks without tipping into contraction.
Adding to the uncertainty is the market psychology around risk perception. Investors, already jittery from months of trade tensions, now have to contend with heightened geopolitical risk premiums. Equity markets remain volatile, global bond yields are under pressure, and capital flows to emerging markets have slowed dramatically. Currency markets too are reacting, with safe-haven assets like the US dollar and gold witnessing renewed demand.
The devil, as always, lies in the transmission mechanisms—how these shocks percolate through trade, investment, consumer sentiment, and financial channels. The Trump tariffs are already distorting trade flows, triggering supply chain reconfigurations and dampening global trade volumes. Simultaneously, the West Asian conflict threatens energy markets, investor confidence, and regional stability.
To policymakers and market participants alike, the message is clear: this is no ordinary cyclical slowdown. The world stands on the cusp of a potential global recession, driven by a dangerous confluence of trade protectionism and geopolitical conflict. While forecasting global downturns is never an exact science, the evidence from past episodes—from the early 1990s Gulf War to the 2008 financial crisis—underscores the risks of ignoring multiple, reinforcing shocks when the global economy is already at its most vulnerable.
The coming months will test the resilience of the global economic system like few periods before. Unless both geopolitical tensions and trade frictions de-escalate meaningfully—and quickly—the odds of a full-blown global recession in 2025 now appear dangerously high.
Dipak Kurmi
Sunday, June 29, 2025