From Growth to Fragility: Global Economy Q2 2025 – Insights from McKinsey

Aug 28, 20254 min read

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Executive Summary

The global economy is entering the second half of 2025 with momentum — but also fragility. The IMF has upgraded its growth forecast to 3.0%, driven by strong US and China performance, resilient consumption, and fiscal support. Yet this recovery rests on shaky foundations. Tariff wars are increasingly tied to political leverage, inflation remains sticky, AI-driven labor displacement is accelerating, and geopolitical flashpoints are multiplying.

For executives, the imperative is not simply to track macro indicators but to anticipate second-order effects: which industries gain from tariff shields, which labor pools are reshaped by automation, and how geopolitical maneuvers redefine supply chain and capital strategies.

Innovation Strategy: Maturity and Labor Realignment

The July McKinsey report underscores that the UK labor market is not just cooling cyclically — it is undergoing systemic displacement. With unemployment at 4.7% and vacancies down 44% since 2022, automation and AI are reshaping hiring across every major sector, from logistics to healthcare. This is not “future risk” but a current restructuring.

C-level leaders must recognize that innovation maturity differs by region. The US retains market momentum in services and equity markets, while China is doubling down with 19 targeted policy measures to stimulate consumption in appliances, passenger vehicles, and services. India’s story is consumption resilience, with core inflation concentrated in “personal care and effects,” showing shifting consumer preferences. Together, these signals suggest executives should:

Reallocate workforce strategy toward roles less exposed to automation, while investing in AI augmentation, not replacement.
Invest in sectors prioritized by government subsidies (e.g., China’s services, EU’s green industries) to ride policy-driven growth waves.
Monitor IP and patent activity as long-term indicators of where competitive advantage will consolidate. While the July report did not explicitly cover IP-related signals, executives should integrate this lens proactively into their innovation strategy.

Innovation strategy is no longer just about adoption speed — it is about aligning corporate moves with policy signals and labor-market restructuring.

Geopolitical Shifts: Tariffs, Sanctions, and Political Leverage

What differentiates the current environment is how explicitly political the trade and tariff landscape has become.

Brazil: US tariffs of 50% are not just economic — they are a pressure tactic tied to former President Bolsonaro’s trial. The US has also suspended travel visas for select Brazilian Supreme Court justices, signaling sanctions beyond trade.
Mexico: Facing a 30% tariff threat unless it addresses fentanyl trafficking, migration, and judicial reforms. While broad-based tariffs are threatened, autos, electronics, and tequila remain shielded under USMCA exemptions — illustrating the selective nature of disruption.
US & EU: A new trade deal sets tariffs on EU exports at 15%, but Europe has pledged $750 billion in US energy purchases over three years, reshaping transatlantic energy and fiscal ties.

For executives, tariffs are no longer predictable trade instruments. They are weapons of political negotiation, and responses must be equally political: lobbying, compliance recalibration, and geographic hedging.

Infrastructure and Trade Bottlenecks

While growth stories dominate headlines, the underlying supply-side picture shows bottlenecks:

Eurozone: Surplus doubled to €16.2B in May, largely from a rebound in chemicals and moderate machinery/vehicles gains. Yet retail sales contracted and consumer confidence remains weak.
Brazil: Manufacturing rebounded, with extractives up 9.2% and factory production up 7.4%; services revenue grew sharply in logistics and finance. But monetary tightening (Selic to 15%) risks stalling this momentum.
Mexico: Exports fell 0.1% in June, dragged by oil (–9.2%) and agriculture (–6.5%). Supply chains remain vulnerable, though auto/electronics exports show resilience under USMCA.
China: Import contraction eased (–0.9% vs –7.0% in Q1), signaling a partial supply recovery. But foreign direct investment collapsed (–21.9%), underscoring structural headwinds.

These cross-sectoral shifts highlight that industrial recovery is uneven, consumption resilient, but investment pipelines constrained. Executives should pressure-test supply strategies: whether their value chains align with growth segments (chemicals, vehicles, logistics) or face exposure to politically targeted commodities (copper, oil, agriculture).

Actionable Risks for C-Level Agendas

1. Tariff Escalation (High Impact, High Likelihood)

US tariffs now function as political bargaining chips, extending beyond trade into judicial and migration issues.
Corporates must hedge by diversifying sourcing and pre-negotiating alternative suppliers.

2. Sticky Inflation (Medium/High)

US inflation at 2.7%, Eurozone near 2%, UK rising to 3.6%. India’s headline at 2.1% but core at 4.5%.
Pricing strategies should be recalibrated with targeted elasticity analysis by sector.

3. Labor Market Disruption (Medium/Medium)

UK vacancies down 44% since 2022; AI displacing across all sectors.
Boards should reassess workforce capital allocation and political risk of job displacement.

4. Fiscal Stress (High/Medium)

Expect capital volatility in LATAM, where Brazil’s tightening into a fragile recovery could choke growth. C-suites should build liquidity buffers and monitor sovereign exposure, preparing for policy-driven credit swings across emerging markets.

5. Geopolitical Flashpoints (High/Medium)

Mexico tariffs tied to fentanyl and judicial reform.
Europe locked into energy commitments.
Corporates must scenario-plan for rapid, politically triggered supply chain shocks.

Executive Priorities for 2025–26

Given this environment, executives should align on three imperatives:

Strategic Hedging: Diversify both suppliers and markets to reduce tariff vulnerability. Don’t assume exemptions will hold.
Labor & Innovation Alignment: Redirect workforce investments to AI-augmented roles and monitor policy-driven innovation subsidies globally.
Liquidity & Capital Resilience: Build buffers for fiscal tightening and anticipate credit market volatility.

Closing Thought

Global growth may be trending upward, but the real story is fragility. Tariffs are now political, inflation is sticky, labor is structurally reshaping, and policy shocks are defining the competitive landscape.

For C-level leaders, the question is not “where is growth?” but “under what conditions is growth sustainable — and how do we secure advantage in volatility?”

Those who act early — by hedging tariffs, repositioning labor strategies, and aligning with policy-backed sectors — will emerge stronger as the fault lines of the global economy deepen.