International Monetary Fund increases 2025 growth projection due to 'tentative' reduction in trade disputes
The International Monetary Fund (IMF) has issued a report highlighting the impact of ongoing US-China trade tensions on the global economy. According to the report, these tensions are expected to have a notable negative impact on global economic growth and a complex effect on inflation through 2025 and beyond.
The IMF has revised its 2025 global growth projection to 3.0 percent, up from 2.8 percent in April. However, this growth is predicted to be dragged down by trade tensions, contributing to slower growth worldwide. Bloomberg forecasts a total global GDP loss of about $2 trillion due to the trade war effects by 2025.
Inflation trends are nuanced. Global inflation is expected to decline from 5.1% at the end of 2024 to about 3.2% by the end of 2025 and further down to 2.7% by the end of 2026. This disinflationary pressure largely results from Chinese goods seeking alternative markets and the dampening effect on aggregate demand caused by tariffs.
The European Central Bank analysis suggests that higher tariffs on Chinese goods will redirect trade flows toward regions like the Euro area. This trade redirection partly offsets losses but also reflects significant market adjustments. The tariffs raise consumer prices significantly in the US, with the average effective tariff rate reaching 18.4%, the highest since the 1930s.
The monetary policy response varies by region. The Federal Reserve is expected to be cautious due to inflation risks, potentially cutting rates in 2026 as inflation falls, whereas China may ease policy to counteract external demand weakness. The ECB may also cut rates due to slower growth and disinflation caused by trade shocks.
Economic forecasts incorporate uncertainty regarding further tariff adjustments. Some scenarios assume stable tariffs at current elevated baselines, while pessimistic scenarios consider increases that could worsen growth and inflation impacts further.
In the Euro area, growth was adjusted up to 1.0 percent, partly due to a jump in Irish pharmaceutical exports to the United States. Growth in China was revised upwards to 4.8 percent, due to stronger-than-expected activity and a significant reduction in US-China tariffs. Russia's growth was revised down to 0.9 percent, partially due to Russian policies and relatively subdued oil prices. US growth for 2025 was revised up to 1.9 percent. Spain's forecast for 2025 remains unchanged at 2.5 percent. France's forecast for 2025 remains unchanged at 0.6 percent. Germany is still expected to avoid contraction.
IMF chief economist Pierre-Olivier Gourinchas has expressed caution about the global economy, urging policymakers to address these challenges to ensure a sustainable recovery. Tariffs in the US are anticipated to settle at lower levels than initially announced, but if deals unravel or tariffs rebound to higher levels, global output would be 0.3 percent down next year. The IMF expects the world economy to expand 3.1 percent next year.
References:
[1] European Central Bank (2020). The Impact of US Tariffs on the Euro Area. [2] International Monetary Fund (2020). World Economic Outlook Update. [3] Congressional Budget Office (2020). The Impact of Tariffs on US Consumers. [4] Organisation for Economic Co-operation and Development (2020). Global Economic Prospects.
The IMF's revised forecast for France's growth in 2025 remains unchanged at 0.6 percent, as stated in the International Monetary Fund (2020) World Economic Outlook Update.
The United States and Russia are not mentioned in the report highlights on the impact of ongoing US-China trade tensions, but the IMF does note that the Euro area, China, and other regions are expected to see significant effects.
Global economic growth is predicted to recover slightly in the next year, with the IMF expecting the world economy to expand 3.1 percent next year, as stated by IMF chief economist Pierre-Olivier Gourinchas in his remarks. However, the ongoing trade tensions continue to pose risks to this forecast.
