2025 in Review
With 2025 now behind us, we thought it would a good time to provide you a wrap-up of major economic and geopolitical developments from the previous year, especially as you head into 2026. Also, here is a link to our website, with various reports we have published (under Quarterly Dashboards and Insights Reports), including the ones referenced below.
Tariffs
The year began with the prospect of new tariffs, or taxes on goods imported into a nation, paid by the importer. On April 2, the administration unveiled tariff rates on nearly every country, ranging from 10% to 50%. After a week of financial market volatility, the administration announced a 90-day pause, during which nations were expected to sign new trade deals with the US. Some deals were signed, many were not, and tariffs increased over time. The administration also introduced product-specific tariffs: import taxes applied regardless of origin (e.g., a 25% tariff on cars), along with product-specific tariff exemptions, notably on computer chips (which are key to AI). Due to the various country and product tariffs, by year-end, the average effective tariff rate was about 10%, representing the average paid across all imported goods.
Inflation
Inflation began the year at 3.0% year-over-year (YoY), meaning a basket of goods and services was up 3.0% compared to the prior year. This was an improvement from the 9.1% peak a few years earlier. Inflation fell to 2.3% by April, near the Fed’s 2.0% target, but later rose to 3.0% in September before receding to 2.7% in November. Within the data, goods inflation, which covers items like clothes, cars, and machinery, rose steadily in Q4. It started at -0.1% in January (indicating falling prices) but ended at 1.8%; potentially because of tariffs.
Labor
Unemployment rose from 4.0% in January to 4.6% by November as the pace of job gains fell from an average of 173,000 per month in 2024 to around 23,000 per month in the second half of 2025. Wage inflation pressures persisted but eased slightly from 3.9% in January to 3.5% by year-end, but still above pre-pandemic norms. Demographics may be playing a role: as outlined in our research, the labor pool is growing more slowly, which may be preventing unemployment from rising further despite slower job additions.
GDP
Despite the headwinds from tariffs, inflation, and a slowing labor market, the overall economy continued growing. GDP did fall -0.6% in Q1, but this was mainly due to technical issues related to tariff front-running. Growth returned at a rapid 3.8% in Q2, with most signs pointing to potentially solid growth in Q3. The US consumer has been resilient, with real consumer spending still growing at 2.1% YoY in September, down only somewhat from 3.3% in January. Business investment was strong, with AI-related investments in computer hardware and software outweighing a pullback in residential construction.
Spending Bill
In July, the government passed the One Big Beautiful Bill, extending prior tax cuts and introducing new ones, such as eliminating taxes on tips and Social Security payments. Defense spending also increased. Overall, the bill is expected to raise the budget deficit by USD 3–4 trillion over a decade, potentially causing total government debt to reach USD 62 trillion by 2034.
Interest Rates
The Fed paused rate cuts early in the year after reducing the benchmark from 5.50% to 4.50% in late 2024, likely due to tariff-related inflation concerns. Cuts resumed in September of this year, bringing the rate to 3.75%. While inflation remains a concern, the Fed appears more focused on labor conditions.
Geopolitics / Foreign Policy
The theme for geopolitics this year was the continuation of a fractured world order, a topic we’ve been discussing for several years. Fragmentation deepened and accelerated as emerging power centers sought to carve out regional spheres of influence. Traditional alliances came under strain (US – Europe and US – Canada), economic and diplomatic partnerships faced pressure (US - India), and potential adversaries continued to seek leverage over each other (US - China). Consistent with our longstanding view, global trade persisted but increasingly reoriented, reshaping geopolitical dynamics among nations.
- US - China: Relations fluctuated sharply. After April 2 tariffs, a trade war erupted. The US raised China-specific tariffs from 54% to 145% within days; China retaliated with 125% tariffs on US goods. Both later eased rates and commenced talks, but tensions lingered, including US port taxes on Chinese ships and China’s threat to restrict rare earth exports (where it controls 90% of supply). Year-end China tariff: 20%.
- US - India: Relations deteriorated when the US imposed tariffs on India totaling 50%. This was partly due to India’s purchase of Russian oil, which the US approved for years to ensure oil market stability (if no one buys Russian oil, it could impact global supplies), and party because of diplomatic friction over US claims of mediating India - Pakistan tensions in May, which India denied. This deterioration matters because US - India ties deepened steadily over 30 years, with the US viewing India as an economic and military partner against China.
- US - Europe: Ties remained strained. The US remained in NATO and continued supplying weapons to Ukraine, but tariffs and diverging security priorities created fissures.
AI
Finally, 2025 was a pivotal year for AI. Economic growth was supported by capital investment in AI infrastructure through the development of data centers and related infrastructure, with persistent strong growth in spending on these projects. This form of spending was one of the major drivers of nonresidential construction. Also, there was the potential “wealth effects” from AI-related equities supporting financial markets, which boosted consumption and overall growth.
Thank you for your support and we look forward to connecting in the new year.
Best,
Shailesh Kumar, Head of Global Insights Center
To contact our team, visit TheHartford.com/gic
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