IMF projects 'significant' global slowdown due to historic tariffs

US outlook also handed a large downgrade as global economic system is 'being reset'

IMF chief economist Pierre-Olivier Gourinchas. AFP

The International Monetary Fund on Tuesday sharply lowered its near-term outlook for the world economy, citing a radical change in trade policies led by President Donald Trump's tariff regime.

The uncertainty caused by recent trade tensions has led the IMF to ditch its typical baseline forecast and instead present a “reference forecast”. That includes Mr Trump's sweeping universal tariff plan and all tariff announcements until April 4.

Under this forecast, the IMF projects global growth to slow from 3.3 per cent last year to 2.8 per cent this year – half a percentage point lower than its January forecast. Growth is expected to recover to 3 per cent next year, although it still represents a downwards revision from the fund's previous estimate.

“We are entering a new era as the global economic system that has operated for the last 80 years is being reset,” IMF chief economist Pierre-Olivier Gourinchas told reporters before the fund's updated World Economic Outlook report.

Mr Trump has announced tariff policies at a dizzying pace since re-entering office in January, met with retaliatory measures announced by its trading partners. That has led the effective tariff rate to reach its highest level in more than a century.

“And beyond the increase in tariffs itself, the surge in policy uncertainty related to trade policy, but more broadly, is a major driver on the outlook,” Mr Gourinchas said.

The IMF also handed a “significant downgrade” to the US's 2025 growth projections at 1.8 per cent, 0.9 percentage points lower than its January update.

“While global growth remains well above recession levels, all regions are negatively impacted this year and next,” Mr Gourinchas said. The fund also raised the probability of a global downturn to 30 per cent.

Growth in the Middle East and Central Asia is projected at 3 per cent this year and 3.5 per cent in 2026, a downwards revision owing to a gradual resumption of oil production, spillovers from conflicts and “slower-than-expected progress” on structural reforms.

The UAE and Saudi Arabia are projected to grow by 4 per cent and 3.8 per cent, respectively, this year. The fund is expected to release a detailed forecast for the region on Thursday.

Meanwhile, growth in the euro area is expected to slow to 0.8 per cent.

“All countries are affected by the surge in policy uncertainty, and that's something that certainly will weigh on the outlook … and is reflected in the decline in oil prices,” Mr Gourinchas said.

Disinflation is expected to continue at a slower pace this year to hit 4.3 per cent, before declining further to 3.6 per cent in 2026. Some regions may see a rise in inflation, he said.

Mr Trump's larger-than-expected tariffs have also weighed on the dollar. On Monday the dollar index, which measures the US note against a basket of foreign currencies, fell as low as 97.92, its lowest since 2022.

Mr Gourinchas said increased uncertainty and “some adjustment” in demand for global dollar assets are also weighing it down.

“These effects seem to dominate in the near-term,” he said.

Alternative forecasts

While the fund is expecting a "significant slowdown" in the near term, it noted that other paths remain in play.

The IMF provided two alternate forecasts: one leading up to Mr Trump's universal tariff announcement on April 2, and a second following his 90-day tariff pause from April 9.

In the former, the fund forecasted global growth of 3.2 per cent for this year and 2026. The latter projection follows the escalating tariffs between Washington and Beijing. Global growth under this scenario is also 2.8 per cent, but Mr Gourinchas said the 90-day pause would not have a material change on the outlook "even if some initially high-tariffed countries would benefit".

“Even if it were extended impermanently, it does not materially change the outlook compared to the reference forecast,” Mr Gourinchas said.

US-China trade war

Mr Trump has pared back his harsher “reciprocal” tariffs on most countries, instead increasing the US trade war with China. The world's two largest economies have imposed 145 per cent tariffs on each other in recent weeks, which could threaten global trade expansion.

The latest IMF report halved its global trade growth projection to 1.7 per cent this year.

It also projects a “significant downgrade” for China's economy with growth forecast at 4 per cent this year, six percentage points lower than in January.

The fund also anticipates that the US and China would still face the negative effects of tariffs even if Mr Trump's 90-day pause on reciprocal tariffs is extended.

“Even if some initially high-tariff countries would benefit, but the US and China would be adversely impacted,” Mr Gourinchas said.

Airing grievances

The so-called reset in global trade comes amid Mr Trump's assertions that other countries have been taking advantage of the US. While he has explained his tariff agenda as a means to lower the trade deficit, he has also called out countries' non-tariff barriers.

As recently as Sunday, Mr Trump bemoaned what he called eight forms of “non-tariff cheating”, including currency manipulation, value-added tax (VAT) and export subsidies.

Donald Trump lists his grievances with non-tariff barriers. Screengrab / Truth Social

“Our trading system was not perfect, and there are some merits to the grievances that have emerged, but we have to all work together towards fixing the system so that it can work for everyone,” Mr Gourinchas said.

His statement comes after IMF managing director Kristalina Georgieva urged countries to reduce tariffs and other non-tariff trade barriers.

Speaking at the fund's headquarters last week, Ms Georgieva said tariff and non-tariff barriers “have fed negative perceptions” that led some countries to believe they are being treated unfairly.