IMF upgrades outlook for global economy

The International Monetary Fund is upgrading the economic outlook for the United States and the world for this year and the next because US President Donald Trump’s protectionist trade policies have so far proven less damaging than expected.

The IMF now forecasts 3.0 per cent growth for the global economy this year. That is down from 3.3 per cent in 2024 but an improvement on the 2.8 per cent it had forecast for 2025 back in April.

The fund, which works to promote growth, stabilise the world financial system and reduce poverty, expects world growth to come in at 3.1 per cent next year, up a tick from the 3.0 per cent it had forecast three months ago.

Trump’s decision on April 2 to impose taxes of 10 per cent or more on US imports from most of the world’s countries had been expected to be a bigger drag on global growth.

But the damage was limited, the IMF said, partly because many US importers scrambled to bring in foreign goods before Trump’s tariffs took effect and partly because Trump ended up suspending his biggest levies. They included a 145 per cent duty on Chinese goods.

“This modest decline in trade tensions, however fragile, has contributed to the resilience of the global economy so far,” IMF chief economist Pierre-Olivier Gourinchas said at a press conference Tuesday.

“This resilience is welcome, but it is also tenuous. While the trade shock could turn out to be less severe than initially feared, it is still sizeable, and evidence is mounting that it is hurting the global economy.’’

Tariffs raised US$108 billion for the US Treasury from October through June, nearly double the US$55.6 billion they brought during the same period of the previous fiscal year.

Global growth of around 3.0 per cent is below pre-pandemic average and the world economy would be growing faster without Trump’s trade wars.

The IMF modestly upped its forecast for US economic growth to 1.9 per cent this year and 2.0 per cent in 2026 when the big tax cuts Trump signed into law July 4 are expected to provide “a near-term boost”.

The Chinese economy, the world’s second biggest, is expected to grow 4.8 per cent this year, a hefty upgrade from the 4.0 per cent the IMF had forecast in April. China is getting a boost from lower-than-expected US tariffs and from government spending.

The 20 economies that share the euro currency are collectively expected to expand 1.0 per cent, up from the 0.8 per cent the IMF had forecast in April. But a big chunk of that growth is coming from a surge of pharmaceutical exports from Ireland, which were timed to beat Trump’s expected tariffs on drugs.

Japan remains in a slow-growth rut and is expected to eke an expansion of just 0.7 per cent this year and 0.5 per cent next.

India is once again expected to be the world’s fastest-growing major economy, expanding a forecast 6.4 per cent this year and next.

Trump has pressured Japan and the European Union to accept 15 per cent US tariffs on their exports. Indonesia, Vietnam and the Philippines also agreed to accept stiff US tariffs. More such deals are expected before Friday when Trump will slap even higher tariffs on countries that don’t agree make concessions.

Trump’s protectionism is buffeting global commerce. The IMF upgraded its forecast for growth in world trade, measured by volume, to 2.6 per cent this year. That is up from the 1.7 per cent it had predicted in April and reflects a surge in shipments as exporters tried to beat the tariff crunch.

But eventually the higher US levies are expected to take a toll. The IMF sees trade growing just 1.9 per cent next year, down from the 2.5 per cent it had forecast in April.

Trump has also unsettled financial markets by openly and repeatedly criticising Federal Reserve Chair Jerome Powell for the Fed’s reluctance to cut American interest rates. Powell has said that the central bank must wait to better understands the impact of Trump’s tariffs on inflation.

That same message was delivered last week by the European Central Bank, which is also holding off on rate calls to measure the impact of Trump’s tariffs.

At the press conference Tuesday, IMF chief economist Gourinchas spoke up in favour of keeping central banks like the Fed independent from political pressure.

“The evidence is overwhelming that independent central banks, with a narrow mandate to pursue price and economic stability, are essential’’ to containing inflationary pressure, he said.

The Fed and other central banks raised rates after inflation flared up in 2021 and 2022. They managed a so-called soft landing – bringing inflation down without causing a recession.

“That central banks around the world achieved a successful ‘soft landing’ despite the recent surge in inflation owes a great deal to their independence and hard-earned credibility,” Gourinchas said.

AP