The International Monetary Fund has revised its global growth projections upwards from the April 2025 reference forecast, from 2.8 per cent to 3.0 per cent this year, and from 3.0 per cent to 3.1 percent next year.

 

A modest decline in trade tensions, however fragile, has contributed to the resilience of the global economy so far, said IMF's latest World Economic Outlook Update.

 

Most regions are experiencing modest growth upgrades this year and next.

 

Following an unprecedented escalation in tariffs imposed on the rest of the world in April, the United States partly reversed course, pausing the higher tariffs for most of its trading partners. This, and a de-escalation of trade tensions with China in May, modestly reduced the US effective tariff rate from 24% to about 17%, it said.

 

Despite these welcome developments, tariffs remain historically high, and global policy remains highly uncertain, with only a few countries having reached fully-fleshed out trade agreements, the report said.

 

A few other developments have also helped:

* First, concerns about future tariffs led to a strong surge in exports to the US in the first quarter of the year. This front-loading helped support activity in Europe and Asia.

* Second, financial conditions improved, and monetary conditions eased as global inflation continues to recede, largely unchanged from our previous projections.

* Third, the dollar has depreciated by roughly 8 percent since January. As we already pointed out in April, the effect of tariffs on exchange rates can be complex. In previous episodes, the tariffing country saw its currency appreciate, buffering the impact of the tariffs. This time around, however, the dollar depreciation has amplified the impact of the tariff shock on other countries’ competitiveness. With a stable value relative to the US dollar, the Chinese RMB has tracked the dollar while the euro has appreciated significantly.

 

"This resilience is welcome, but it is also tenuous. While the trade shock could turn out to be less severe than initially feared, it is still sizeable, and evidence is mounting that it is hurting the global economy. For instance, compared to our pre-April 2 forecast, global growth is revised downwards by 0.2 percentage points this year. At around 3 percent, global growth remains disappointingly below the pre-COVID average," said Pierre-Olivier Gourinchas, Economic Counsellor and Director of the Research Department, IMF.

 

"And we continue to project a persistent decline in global trade as a share of output despite the recent front-loading, from 57% in 2024 to 53% in 2030," he said.

 

Risks to the global economy remain firmly to the downside

The current trade environment remains precarious. Tariffs could well reset at much higher levels once the ‘pause’ expires on August 1 or if existing deals unravel. If this were the case, model-based simulations suggest global output would be 0.3 percent lower in 2026.

 

Without comprehensive agreements, the ongoing trade uncertainty could increasingly weigh on investment and activity, said IMF.

 

Further, while exports front-loading has supported global activity so far, firms could become vulnerable if the demand for stockpiled goods does not materialize.

 

The geopolitical environment also remains fragile, with a potential for more negative supply disruptions.

 

While global inflation continues to decline, the latest price data suggests that inflation pressures are building gradually in the US. Overall, US import prices in dollars have remained largely unchanged or even increased this year, suggesting that the cost of tariffs will be borne by US retailers, and eventually customers as firms start to pass through higher costs into their prices.

 

In too many countries, the combination of high public debt and still elevated public deficits continues to be a cause for concern. The lack of fiscal space makes these countries especially vulnerable to a sudden tightening in financial conditions that increase term premia.

 

Such tightening becomes even more likely if central bank independence — a cornerstone of macroeconomic, monetary and financial stability — is undermined.

 

Turning to policies, IMF recommendations continue to call for prudence and the need for improved collaboration.

 

Priorities

Gourinchas outlined some key priorities:

* First and foremost, restoring stability in trade policy is essential to reduce policy uncertainty. We urge all parties to settle trade disputes and agree on clear and predictable frameworks. Collective efforts should be made to restore and improve the global trading system.

* The need for predictable and stable rules extends to other areas of policymaking. It is important to reaffirm and preserve the principle of central bank independence. The evidence is overwhelming that independent central banks, with a narrow mandate to pursue price and economic stability, are essential to anchoring inflation expectations. That central banks around the world achieved a successful ‘soft landing’ despite the recent surge in inflation owes a great deal to their independence and hard-earned credibility.

* Restoring fiscal space remains a priority for many countries. Even where new spending needs are emerging, efforts must be made to implement gradual and credible consolidation while protecting growth.

* Lastly, as global growth remains tepid, more efforts must be made to increase long-term productivity through structural reforms. - TradeArabia News Service