The International Monetary Fund (IMF) has warned that escalating global trade tensions, spurred by a surge in tariffs, will shave 0.8 percentage points off global economic growth this year and next, pushing it down to 2.8% and 3.0% respectively.
According to the IMF’s latest World Economic Outlook, the world is entering a period of economic reset where decades-old trade rules are being challenged, and new ones have yet to take shape. This shift is being accelerated by the United States’ imposition of widespread tariffs since January, which culminated on April 2 with almost universal levies. The impact has been swift, pushing effective tariff rates above levels seen during the Great Depression.
“The resulting epistemic uncertainty and policy unpredictability is a major driver of the economic outlook. If sustained, this abrupt increase in tariffs and attendant uncertainty will significantly slow global growth,” the report noted.
The IMF’s reference forecast includes tariff actions between February 1 and April 4, as well as countermeasures by affected countries. It projects a global growth rate of 2.8% for 2025 and 3.0% for 2026—a significant downgrade from its January forecast.
In contrast, an alternative forecast that excludes the latest tariffs (before April 2) would have led to a much smaller downgrade of just 0.2 percentage points, resulting in projected growth of 3.2% in both years. A third scenario, incorporating developments after April 4—where the US paused most tariffs but intensified levies on China—suggests only a marginal difference from the reference forecast.
“This is because the overall effective tariff rate of the United States and China remains elevated even if some initially highly tariffed countries will now benefit, while policy-induced uncertainty has not declined,” the IMF explained.
While the forecast does not signal a global recession, it does highlight vulnerabilities. Inflation is expected to rise modestly—by about 0.1 percentage points each year—but the momentum of disinflation continues. However, trade growth is projected to slow even more sharply, dipping to 1.7% in 2025.
This drop in trade growth is particularly concerning given the complexity of modern supply chains. Most global trade involves intermediate goods that cross borders multiple times before reaching consumers. Any disruption, the IMF warns, could cause ripple effects throughout the global economy.
Tariffs are also impacting individual economies differently. In the United States, where domestic demand was already cooling, the IMF has slashed the 2025 growth forecast to 1.8%, down 0.9 percentage points from January. Almost half of that decline—0.4 percentage points—is directly attributed to tariffs. The US inflation forecast has also been revised upward by 1 percentage point to 3%.
For China, the forecast sees a 0.6 percentage point drop in growth to 4%, while inflation is projected to fall by 0.8 percentage points. Meanwhile, the euro area, which is less exposed to tariff pressures, sees a minor revision, down 0.2 percentage points to 0.8%.
Emerging market economies are not spared either. Their growth is expected to slow by 0.5 percentage points, dropping to 3.7%. The IMF warned that the impact could be worse depending on how trade tensions evolve.
Companies are likely to react to uncertainty by pulling back on investment and spending. “Financial institutions will reassess borrowers’ exposure. The increased uncertainty and tightening of financial conditions could well dominate the short term,” the report said, citing the sharp decline in oil prices as an example.
Tariff-related shocks are also likely to weigh on currencies. Although tariffing countries like the US might initially see a stronger currency, long-term effects—such as reduced productivity—could ultimately weaken it. “In the medium term, the dollar may depreciate in real terms if the tariffs translate into lower productivity in the US tradable goods sector, relative to its trading partners,” the IMF stated.
On policy, the IMF emphasized the need for greater coordination and restraint. It urged countries to restore stability in trade policy and work toward “mutually beneficial arrangements.” A more predictable system, the report argues, is necessary to address non-tariff barriers and trade-distorting measures.
“Growth prospects could, however, immediately improve if countries ease their current trade policy stance and forge new trade agreements,” it said.
Monetary policy will also need to stay nimble, the IMF advised. Countries facing inflationary pressures may need to tighten policy aggressively, while those experiencing demand shocks might require lower rates.
Meanwhile, fiscal authorities will face increasingly difficult choices. Many nations are grappling with high debt, slow growth, and rising interest costs. “Most countries still have too little fiscal space and need to implement gradual and credible consolidation plans,” the report said.
The IMF also flagged growing demands for public spending—from defense to targeted support for those hurt by trade disruptions—and advised that such spending be carefully financed, ideally through new revenue or offsetting cuts rather than debt.
Beyond short-term adjustments, the IMF called on governments to invest in long-term reforms that promote growth, innovation, and productivity—such as building digital infrastructure and retraining workers for the era of artificial intelligence.
In concluding, the IMF warned against oversimplified narratives that pit winners against losers in trade and technology. It urged policymakers to consider more thoughtful interventions. “It is a collective responsibility to ensure the right balance between the pace of progress or globalization and addressing the associated dislocations,” the report said.
Quoting its foundational principles, the IMF reminded the world that its mission is “to facilitate the expansion and balanced growth of international trade, and to contribute thereby to the promotion and maintenance of high levels of employment and real income.”
“Global integration is not an objective in and of itself,” it emphasized. “It is a means to an end—important insofar as it supports improved living standards for all.”
