IMF slashes global growth forecast citing US tariffs and trade disruption

IMF slashes global growth forecast citing US tariffs and trade disruption

The International Monetary Fund (IMF) has warned of a significant slowdown in the global economy, slashing its growth projections as a result of US tariffs, unprecedented uncertainty, and escalating geopolitical conflict. The organization reports that the global system operating for the last 80 years is being reset, leading to a sharp increase in both tariffs and market instability.

According to the latest World Economic Outlook report, global growth is projected to fall from 3.3% in 2024 to 2.8% in 2025, before edging up to 3% in 2026. This represents a downgrade of 0.5 percentage points for 2025 and 0.3 percentage points for 2026 compared to forecasts published in January.

Trade Disruptions and Tariff Impact

The IMF produced its latest projections under exceptional circumstances following the unveiling of new and higher tariffs by US President Donald Trump. These measures and subsequent countermeasures have pushed US and global tariff rates to centennial highs. The fund anticipates that the surge in uncertainty and tariffs since April 2 will lead to a near-term slowdown in growth.

Global trade growth projections have been cut by 1.5 percentage points. The IMF warned that a trade war would specifically impact the US, China, and various countries across Europe and Asia. Furthermore, the fund noted that global firms may respond to these tariffs by cutting spending or suspending investments, while banks could slow lending as they assess borrower exposure to the new trade environment.

The US growth forecast has been reduced to 1.8%, a drop of 0.9 percentage points from the previous prediction. The IMF also noted that the probability of a US recession has risen sharply from approximately 25% to around 40%.

Geopolitical Volatility and Energy Shocks

Economic momentum has been further stalled by war in the Middle East. The IMF reports that US and Israeli strikes on Iran, alongside Tehran's closing of the Strait of Hormuz and attacks on energy infrastructure, have driven gas and oil prices higher. This conflict has pushed the IMF's global inflation expectation for this year up to 4.4%, from 4.1% in 2025 and 3.8% in January.

The fund’s current forecast assumes a short-lived conflict and a moderate 19% rise in energy prices. However, in a severe scenario where shocks extend into next year and central banks raise rates to fight inflation, global growth could plummet to 2% in 2026 and 2027.

The impact of these energy shocks varies by region:

• Sub-Saharan Africa: The outlook was lowered to 4.3% from a January expectation of 4.6%.
• Euro Area: The 21 countries sharing the euro are forecast to grow 1.1% this year, down from 1.4% in 2025.
• Russia: As an energy exporter, Russia's forecast was upgraded to 1.1%.
• Ukraine: National Bank of Ukraine governor Andriy Pyshnyy stated that fuel costs pushed annual inflation to 7.9% in March, exceeding the 7% forecast.

Regional Outlooks and Economic Strain

In the UK, the economy is predicted to grow by 1.1% this year, 0.5 percentage points lower than January's forecast. This reflects the impact of tariffs and weaker consumption caused by energy price hikes and inflation. UK inflation is expected to be 3.1% this year, 0.7 percentage points higher than previously forecast, the highest among G7 nations.

Chancellor Rachel Reeves stated that the UK remains the fastest-growing European country in the G7 and asserted that the government is delivering reforms to drive long-term growth. Shadow chancellor Mel Stride countered that Labour's policies are stifling growth and increasing the cost of living.

In China, growth is predicted to be 4% this year, down from a previous forecast of 4.6%.

Market Risks and Central Bank Independence

IMF Managing Director Kristalina Georgieva warned that uncertainty is the new normal and cautioned that the full impact of US tariffs has yet to unfold because many firms front-loaded exports earlier in the year. She pointed to the gold price topping $4,000 an ounce and high US stock valuations as signs of investor anxiety.

Georgieva drew parallels between current valuations of tech firms and the dotcom bubble from 25 years ago, warning that a sharp correction could drag down world growth and harm developing countries.

The IMF also emphasized the necessity of central bank independence to keep inflation expectations anchored. This comes amid attacks by President Trump on US Federal Reserve chairman Jerome Powell, whom the president branded a major loser for not cutting rates.

IMF chief economist Pierre-Olivier Gourinchas noted that the outlook could brighten if countries de-escalate their tariff stances and coordinate to provide stability on trade policy.