## FOREWORD

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### Overview
- In April 2025 the United States announced the imposition of sizable tariffs against most of its trading partners, a major departure from trade policy rules and norms.
- The April 2025 World Economic Outlook (WEO) offered a range of estimates of the downward revision in global growth, from modest to significant, depending on the ultimate severity of the trade shock.
- Six months later, the negative impact on the global economy is at the modest end of the range: global growth is now projected at 3.2 percent this year and 3.1 percent next year.

### Trade shock and immediate effects
- The private sector front-loaded imports in the first half of the year and speedily reorganized supply chains to redirect trade flows.
- Negotiation of trade deals between various countries and the US, and overall restraint from the rest of the world, kept the trading system largely open.
- The US effective tariff rate remains high (at about 19 percent), and trade policy uncertainty remains high.
- The tariff shock’s full effect may increase over time as firms pass tariffs on to customers and trade is rerouted more permanently, reducing global efficiency.

### Other forces shaping the outlook
- United States:
  - Stricter immigration policies are reducing labor supplied by foreign-born workers (a negative supply shock).
  - This has been offset so far by a roughly equivalent decline in labor demand from cyclical cooling after many years of strong job growth, leaving the unemployment rate mostly unchanged.
  - Financial conditions remain very accommodative, with a dollar that has lost some of its strength.
  - Strong boom in artificial intelligence (AI)–related investment coupled with a modestly expansionary fiscal policy in 2026 is supporting output while adding to price pressures from tariffs.
- Rest of the world:
  - China: growth projected to decline only modestly owing to a sharp depreciation of the real effective exchange rate, a front-loaded surge in exports toward Asian and European partners, and some fiscal expansion.
  - Euro area: fiscal expansion in Germany has played a role in boosting growth in 2025.
  - Emerging market and developing economies have benefited from easier financial conditions on the back of a depreciated dollar and continue to show resilience partly due to strong and improving policy frameworks.

### Quantified legacy of the shock
- Compared with the projections in the October 2024 WEO, the tariff shock results in a cumulative global output loss of about 0.2 percent by the end of 2026.
- In the US, growth is revised down and inflation is revised up compared with last year’s projections, indicating a negative supply shock.

### Key downside risks
- AI boom:
  - Parallels with the dot-com boom of the late 1990s: market optimism pushing up stock valuations, fueling a tech-centered investment boom, and sustaining consumption via strong capital gains.
  - Could push the neutral interest rate up and, if continued unabated, require tighter policies.
  - Historical precedent: between June 1999 and May 2000, the Federal Reserve needed to raise its policy rate by a cumulative 175 basis points to contain inflationary pressures.
  - Risk of a significant market repricing that could impact aggregate wealth, consumption, and broader financial markets.
- China’s prospects:
  - More than four years after the property bubble burst, the sector has still not been put on a firm footing; real estate investment continues to shrink and the economy teeters on the verge of a debt-deflation cycle.
  - Large-scale subsidies to manufacturing appear to have reached their limit and are contributing to significant misallocation of resources; strong productivity gains in some sectors (electric vehicles, solar panels) contrast with the absence of aggregate productivity gains.
- Public finances:
  - Lower growth prospects, higher real interest rates, more elevated debt levels, and new spending needs (defense or national security) make the fiscal equation more challenging.
  - All major advanced economies saw their spreads rise during the April sell-off; only a handful of safe haven countries experienced pronounced falls in longer-term yields.
  - Low-income countries are more vulnerable given reduced official aid flows; rising unemployment could translate quickly into social unrest.
- Pressure on policy institutions:
  - Increased pressure on central banks and other policy-setting institutions risks eroding credibility gains; preserving independence is critical to keep inflation expectations anchored.

### Upside scenarios and potential lifts to output
- A material decrease in global economic policy uncertainty through clearer and more stable bilateral and multilateral trade agreements can raise global output by 0.4 percent in the very near term.
- Lowering tariffs based on these agreements adds about 0.3 percent to global output.
- AI improving total factor productivity, under modest assumptions, could add another 0.4 percent to global output in the near term.

### Policy recommendations
- Trade policy:
  - Update trade rules to reflect the changing nature of trade relations and deepen trade relations where possible.
- Fiscal policy:
  - Reduce fiscal vulnerabilities gradually and credibly.
  - Improve the efficiency of public spending to help address crowding in private investment.
- Monetary policy:
  - Remain tailored and transparent.
  - Preserve the independence of monetary policy institutions as a precondition for macroeconomic stability.
  - Provide technocratic institutions with the tools to focus on core mandates, including adequate data provision.
- Structural and longer-term policies:
  - Prefer horizontal policies over sectoral industrial policies, given limited effectiveness and considerable side effects of the latter.
  - Invest in education, public research, public infrastructure, good governance, financial and macroeconomic stability, and a regulatory environment that balances flexibility and innovation with risk containment.
- Multilateral cooperation:
  - Strengthen multilateral frameworks and institutions; the recent resilience owes in part to restrained trade retaliation and adherence to global trading norms.
  - An adaptive and pragmatic multilateral system is increasingly important amid geopolitical tensions.

*International Monetary Fund | October 2025 — Foreword*

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_Source: https://www.imf.org/-/media/files/publications/weo/2025/october/english/foreword.pdf_