In advance of a rise in US tariffs on August 1 and a decrease in the effective US tariff rate from 24.4%, the International Monetary Fund slightly raised its global growth forecasts for 2025 and 2026.
However, it cautioned that the world economy was in danger of experiencing significant risks, including a potential rebound in tariff rates, geopolitical tensions, and larger fiscal deficits that could cause inflation and exacerbate global financial conditions.
According to Pierre-Olivier Gourinchas, IMF chief economist, “the world economy is still hurting, and it’s going to continue hurting with tariffs at that level, even though it’s not as bad as it could have been.”
The IMF increased its forecast for global growth by 0.2% to 3.1% for 2025 and by 0.1% to 3.1% to 3.1% in a revised version of its World Economic Outlook from April. That is still below the 3.3 percent growth it had anticipated for both January years and the 3.7 percent pre-pandemic historical average.
It stated that as tariffs were passed through to consumers in the second half of the year, inflation would likely remain above target in the US, but that global headline inflation was projected to decrease to 4.2 percent in 2025 and 3.6 percent in 2026.
Since April, the US effective tariff rate, which is calculated by import duty revenues as a percentage of goods imported, has decreased, but it is still significantly lower than the initial estimate of 2.5 percent. According to the IMF, the rest of the world’s tariff rate is 3.5%, up from 4.1% in April.
Donald Trump, the president of the US, has imposed a 10% universal tariff on nearly all nations since April, threatening to impose even higher duties starting on Friday, upending global trade. The US and China’s tariffs, which are much higher, have been put on hold until August 12, with potential extension talks in Stockholm starting this week.
Additionally, the US has announced steep duties that range from 25 to 50 percent on cars, steel, and other metals, with plans to increase them to 25 percent or 50 percent for lumber, semiconductor, and pharmaceutical products.
According to the IMF, these upcoming tariff increases do not appear in the IMF’s numbers, which could further increase effective tariff rates, causing bottlenecks, bottlenecks, and amplifying the effects of higher tariffs.
shifting tariffs
Gourinchas claimed that the IMF was looking into potential 15-percent tariff agreements reached by the US with the European Union and, over the course of the past week, too late to account for the anticipated July forecast, but that the tariff rates were comparable to the 17.3 percent rate that governed the IMF’s forecast.
He continued, noting that it was unclear whether these agreements would last forever, adding that “we are not currently seeing a significant change in our relationship with the effective tariff rate that the US is imposing on other countries.”
We’ll have to wait to see whether these deals continue, whether they have broken, or whether other trade policy changes have come after them.
According to staff simulations, if the IMF’s April and July tariff caps were implemented, global growth would be roughly 0.2% lower in 2025.
The IMF claimed that the world economy was currently “resilient” but that uncertainty was still high and that current economic activity suggested “distortions from trade, rather than underlying robustness.”
Gourinchas claimed that the 2025 outlook had been improved as a result of what he termed “a tremendous amount” of front-loading as businesses attempted to avoid the tariffs, but he warned that the stockpiling boost would not last.
He continued, “That will fade away,” adding that “that will continue to impede economic activity into 2026.” One of the risks we face is that that front loading will be offset.
He claimed that tariffs were anticipated to remain high, indicating signs that US consumer prices were starting to rise.
“The underlying tariff is significantly higher than it was in January and February.” If that persists, “… , it will have an impact on growth going forward, making global performance really unimpressive.”
Gourinchas pointed out that the dollar’s depreciation, which was unusual during earlier trade tensions, was causing other nations’ tariff shock while also easing financial conditions.
In 2025, according to forecasts, US growth would increase by 0.1 percentage points from April, edging up to 2 percent in 2026. According to the IMF, a new US tax cut and spending law was supposed to reduce the US fiscal deficit by 1.5 percentage points, with tariff revenues accounting for the other half.
It increased its forecast for the euro area by 0.2 percentage points to 1% in 2025, leaving the forecast for 2026 at 1.2 percent unchanged. Without it, the revision would have been half as significant, according to the IMF, which was due to a historically significant increase in Irish pharmaceutical exports to the US.
The outlook for China improved by 0.8%, reflecting stronger-than-expected activity in the first half of the year and the significant reduction in US-China tariffs following Washington and Beijing’s temporary truce.
The IMF’s forecast for 2026 growth for China increased by 0.2% to 4.2%.
In 2025, growth is anticipated to be in the emerging markets and developing economies of 4.1 percent, down from 4.2 percent in 2026, according to the report.
Source: Aljazeera
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