Trump uncertainty adds to global economic headwinds, IMF chief says

Kristalina Georgieva says strength of US economy is surprising as countries face diverging forecasts

IMF Managing Director Kristalina Georgieva. EPA

US president-elect Donald Trump's threat of tariffs brings a new degree of uncertainty to the global economic outlook, International Monetary Fund Managing Director Kristalina Georgieva said on Friday.

"Not surprisingly, given the size and role of US economy, there is keen interest globally in the policy directions of the incoming administration, in particular on tariffs, taxes, deregulation and government efficiency," she told reporters at the fund's headquarters in Washington.

"This uncertainty is particularly high around the path for trade policy going forward, adding to the headwinds facing the global economy."

While she did not mention Mr Trump by name, her remarks echo a consensus among economists and central banks on the uncertainty of the incoming administration's direction when it comes to US policy.

Her remarks come 10 days before Mr Trump is set to return to the White House after running a campaign whose economic agenda championed protectionist policies.

Mr Trump has maintained his position of planning to impose universal tariffs on 10 to 20 per cent of all imports, as well as an additional 60 per cent levy on goods from China. The IMF chief has warned over the course of the last year of the rising threats of fragmentation.

The inflationary potential of these policies as well as stronger-than-expected US growth have caused a recent spike in the bonds market, with the 10-year Treasury yield rising to its highest level since 2023 earlier on Friday off the back of a strong employment report.

Yields on the 10-year Treasury closed at 4.765 per cent, more than 100 basis points since the Fed began reducing interest rates in September. The Fed’s target range is currently 4.25-4.5 per cent, 100 basis points lower since September.

"So you get 200 points divergence," Ms Georgieva said.

When he assumes office on January 20, Mr Trump will be inheriting an economy that continues to outperform expectations.

The US economy grew by a robust 3.10 per cent last quarter, driven by consumer spending despite higher borrowing costs. While inflation has fallen on an uneven path, the labour market remains on solid footing.

The IMF in October projected the US economy to grow by 2.2 per cent this year after an estimated 2.8 per cent growth in 2024.

The strength of the US economy has also given Fed officials reason to pare back rate cuts, likely to begin with a pause later this month. Ms Georgieva said the Fed can "afford to wait" on more data before issuing another rate cut.

This also reflects a divergence in monetary policy, she said, noting that while the global disinflationary trend will continue, progress is stalled in some countries.

US economic strength also contributes to a divergence in global growth prospects. While the US economy is doing better than the IMF had anticipated, Ms Georgieva said India's economy is a "little weaker" and China continues to face deflationary pressures and challenges to domestic demand.

"And low-income countries, despite all the efforts they are making, are in a position when any new shock can affect them quite negatively," she said.

Speaking on the shift in market expectations, the IMF chief noted the current strength of the US dollar against other advanced currencies as well as emerging market currencies. Ms Georgieva said the stronger dollar could lead to higher funding costs for emerging market and low-income economies.

Faced with higher long-term borrowing costs, Ms Georgieva said countries can "only grow" out of debt.

"We have been talking about it for quite some time, lowest medium-term growth prospects in decades. And what is even more concerning is that the main reason for slowing growth is slowing productivity growth," she said.

The fund's most recent projections estimate the global economy to grow at an anaemic 3.1 per cent in the medium-term.

The IMF will release its updated World Economic Outlook on January 17.