Trade tariffs will result in a big shock to global growth but not a recession, the International Monetary Fund (IMF) has said.
In its latest World Economic Outlook report, the Washington-based institution warned that the increase in tariffs and in the uncertainty caused by US president Donald Trump’s protectionist trade measures would lead to a significant slowdown in global growth in the near term.
However, it stopped short of predicting a worldwide recession.
Instead global growth is forecast to be lower than previously estimated, dropping to 2.8 per cent in 2025 and 3 per cent in 2026, down from a previous forecast of 3.3 per cent for both years.
“Intensifying downside risks” and “more elevated trade policy uncertainty” could further reduce these forecasts, it warned.
In its report, the IMF put the probability of a recession occurring in 2025 at 37 per cent. It warned that uncertainty, especially that regarding trade policy, has surged to unprecedented levels.
Major policy shifts are “resetting the global trade system and giving rise to uncertainty that is once again testing the resilience of the global economy”, it said.
Global stock markets have been on a roller-coaster ride since Mr Trump’s “liberation day” tariffs announced on April 2nd while predictions of a global recession have risen as companies pause spending and investment amid the uncertainty.
As a result of tariffs, growth in the US economy is expected to slow to 1.8 per cent, 0.9 of a percentage point lower than the previous projection while growth in the euro zone is forecast to be 0.8 per cent, down from 1 per cent in the most recent previous estimate.
While headline inflation in most countries is expected to continue to decline, the pace of decline will be “slower than what was expected in January” because of tariffs.
“Since February, the United States has announced multiple waves of tariffs against trading partners, some of which have invoked countermeasures,” it said.
“Markets first took the announcements mostly in stride, until the United States’ near-universal application of tariffs on April 2nd, which triggered historic drops in big equity indices and spikes in bond yields, followed by a partial recovery after the pause and additional carve-outs announced on and after April 9th,” it said.
It warned that the price-to-earnings ratios for many companies in the US remain elevated and therefore could see further declines.
“Despite significant equity market corrections in early March and April, price/earnings ratios in the United States remain at elevated levels in historical context, raising concerns about the potential for further disorderly corrections,” it said.
In the foreword to the latest report, the IMF’s chief economist Pierre-Olivier Gourinchas noted that Mr Trump’s controversial tariff announcement forced the institution to jettison its economic projections at the last minute “and compress a production cycle that usually takes more than two months into less than 10 days”.
“While many of the scheduled tariff increases are on hold for now, the combination of measures and countermeasures has hiked US and global tariff rates to centennial highs,” he said.
“However, the context for such increases is very different. Unlike in the previous century, the global economy is now characterised by a high degree of economic and financial integration, with supply chains and financial flows criss-crossing the world, whose potential unwinding could constitute a big source of economic upheaval,” he said.
“For this reason, we expect that the sharp increase on April 2nd in both tariffs and uncertainty will lead to a significant slowdown in global growth in the near term,” he said.
