WASHINGTON, D.C. April 23: The global economic system is entering a new era with a reset from the last 80 years of its operations, said International Monetary Fund (IMF) chief economist and director of its Research Department, Pierre‑Olivier Gourinchas.
“Since late January, many tariff announcements have been made, culminating on April 2, with near universal levies from the United States and counterresponses from some trading partners. The U.S. effective tariff rate has surged past levels reached more than 100 years ago, while tariff rates on the U.S. have also increased,” he said at the presentation of the World Economic Report- A Critical Juncture Amid Policy Shifts – on Tuesday, April 22 here, which was streamed live through the IMF’s website.
“Beyond the abrupt increase in tariffs, the surge in policy uncertainty is a major driver of the economic outlook. If sustained, the increasing trade tensions and uncertainty will slow global growth significantly. Reflecting this complexity, our report presents a reference forecast which incorporates policy announcements up to April 4 by the U.S. and trading partners.
“Under these reference forecasts, global growth will reach 2.8 percent this year and 3 percent next year, a cumulative downgrade of about 0.8 percentage points relative to our January 2025 WEO update. Our report also offers a range of forecasts under different policy assumptions.
“Under an alternative path that excludes the April tariff announcements, global growth would have seen only a modest downgrade to 3.2 percent this year. We will also use a model‑based forecast to incorporate the temporary suspension of most tariffs announced on April 9, together with the increase in bilateral tariffs between China and the U.S. to prohibitive levels. This pause, even if extended permanently, delivers a similar growth outlook as a reference forecast, 2.8 percent, even if some highly tariffed countries could benefit.”
He said that while global growth remained well above recession levels, all regions woudl be negatively impacted this year and next.
Global disinflation would also continue, but at a slower pace with inflation revised up by 0.1 percentage point in both years. These trade tensions will greatly impact global trade.
“We project that global trade growth will be more than cut in half from 3.8 percent last year to 1.7 percent this year. The tariffs will play out differently in different countries. For the United States, the tariffs represent a supply shock that reduces productivity and output permanently and increases price pressures temporarily. This adds to an already weakening outlook and leads us to revise growth down by 0.9 percentage points to 1.8 percent, with a 0.4 percentage point downgrade from the tariffs only. While inflation is revised upwards.
“For trading partners, tariffs act mostly as a negative external demand shock. Weakening activity and prices, even if some countries could benefit from trade diversion. This is why we have lowered our China growth forecast this year to 4 percent, while inflation is revised down by 0.8 percentage points, increasing deflationary pressures.”
He said all countries would be negatively affected by the surge in trade policy uncertainty, as businesses cut purchases and investment, while financial institutions reassess their borrowers’ exposure. Uncertainty also increases because of the complex sectoral disruptions that tariffs could cause up and down supply chains, as seen during the pandemic.
The effect of these shocks on exchange rates is complex. The tariffs could appreciate the US dollar, as in previous episodes. However, greater policy uncertainty, lower U.S. growth prospects, and an adjustment in the global demand for dollar assets are weighing down on the dollar.
Risks to the global economic have increased and are firmly to the downside.
“While we are not projecting a global downturn, the risks it may happen this year have increased substantially, from 17 percent projected back in October to 30 percent now. An escalation of trade tensions would further depress growth. Financial conditions could also tighten, as markets react negatively to diminished growth prospects and increased uncertainty. On the flip side, growth prospects could immediately improve if countries ease from their current trade policy stance and promote a new, clear, and stable trade environment.”
Addressing domestic imbalances can also help raise growth while contributing significantly to closing external imbalances. For Europe, this means spending more on public infrastructure to accelerate productivity growth. For China, it means boosting support for domestic demand. While for the U.S., it means stepping up fiscal consolidation.
“Turning to policies. Our recommendations call for prudence and improved collaboration. Let me outline some key ones. First, an obvious priority is to restore trade policy stability. The global economy needs a clear, stable, and predictable trading environment, one that addresses some of the longstanding gaps in international trading rules. Monetary policy will need to remain agile and respond by tightening where inflation pressures re‑emerge, while easing where weak demand dominates. Monetary policy credibility will be key, especially where inflation expectations might de‑anchor. And central bank independence remains a cornerstone.
“Many fiscal authorities will face new spending needs to bolster defense spending or to offset the trade dislocations, likely to come. Some of the poorest countries also hit with reduced official aid could experience debt distress. Yet debt levels are still elevated and most countries still need to rebuild fiscal space, including by implementing structural reforms. Support, where needed, should remain narrowly targeted and temporary. It is easier to turn on the fiscal tap than to turn it off. Where new spending needs are permanent, as for defense spending in some countries, planning for offsetting cuts elsewhere or new revenues should be made.”
–WE