Toward a Better Balanced and More Resilient World Economy
IMF News, April 17, 2025
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- Published: April 17, 2025
Part one: What is the context?
- Trade tensions have intensified after a long buildup—described as a pot that was bubbling for a long time and is now boiling over.
- Root causes highlighted:
- Erosion of trust in the international system and between countries.
- Uneven distribution of gains from global economic integration: communities hollowed out by jobs moving overseas; wages repressed; price effects from supply-chain interruptions.
- Rise in trade distortions—tariff and nontariff barriers—feeding perceptions of unfairness.
- Empirical and illustrative references in the speech:
- Convergence toward a low and stable U.S. effective tariff rate stalled in the last decade (Figure 3).
- A rising count of net new subsidy measures by major jurisdiction (Figure 4) indicates nontariff barriers on an upward trend.
- National security considerations and self-reliance:
- Strategic goods (from computer chips to steel) increasingly viewed through a national-security lens, favoring domestic production even at higher cost.
- Structural shifts:
- Industry increasingly prioritized over services; national interests increasingly trump global concerns; assertive actions provoke assertive reactions.
Part two: What are the consequences?
- Overall assessment: Significant.
- Tariff developments:
- U.S. effective tariff rate has jumped to levels last seen several lifetimes ago (Figure 5); other countries have responded.
- Spillovers and size effects:
- China, the EU, and the United States are identified as the world’s three largest importers despite relatively low imports to GDP (Figure 6); their actions have outsized global impact.
- Smaller advanced economies and most emerging markets are more trade-dependent and thus more exposed, including to tighter financial conditions.
- Low-income countries face collapsing aid flows as donors pivot to domestic concerns.
- Three specific impact observations:
- Uncertainty is costly: complexity of modern supply chains makes planning difficult; outcomes include delayed investment, volatile financial markets, higher precautionary savings, and logistical disruptions.
- Rising trade barriers hit growth upfront: tariffs raise costs (importers through lower profits, consumers through higher prices) and act quickly by raising the cost of imported inputs; inward investment responses can offset this but take time.
- Protectionism erodes productivity over the long run, especially in smaller economies: shielding reduces incentives for efficient resource allocation, weakens entrepreneurship, and hurts innovation—mitigated only when domestic markets are large and competition is vibrant.
- Financial market risks:
- Protracted high uncertainty raises the risk of financial market stress; recent unusual movements in key bond and currency markets are noted (Figure 7). The dollar depreciated and U.S. Treasury yield curves “smiled” despite elevated uncertainty.
- Forecast implications:
- The upcoming World Economic Outlook (to be released early next week) will quantify costs; it will include notable markdowns to growth projections, but not recession, and markups to inflation forecasts for some countries.
- Determined policy actions to resolve differences and rebalance can deliver better outcomes.
Part three: What can countries do? (Policy recommendations)
- Strengthen domestic fundamentals and rebuild policy space:
- Take resolute fiscal action to rebuild policy space with gradual adjustment paths that respect fiscal frameworks.
- Provide targeted and temporary fiscal support only if shocks necessitate renewed fiscal measures.
- Preserve monetary credibility: monetary policy must remain agile and credible, supported by strong commitment to central bank independence; central bankers should closely monitor data, including higher inflation expectations in some cases.
- Maintain strong financial regulation and supervision; monitor and contain rising risks from nonbanks.
- Emerging market economies should preserve exchange rate flexibility as a shock absorber; consider IMF’s Integrated Policy Framework for guidance on temporary measures.
- Low-income country priorities:
- Strengthen domestic resource mobilization and seek international support to improve reform capacity and secure crucial financial assistance.
- Public debt and restructuring:
- Countries with unsustainable public debt should move proactively to restore sustainability, including by seeking debt restructuring where appropriate.
- The Global Sovereign Debt Roundtable will publish a playbook to assist country authorities considering debt restructuring.
- Lift growth potential through structural reforms:
- Reforms recommended include banking, capital markets, competition policy, intellectual property rights, and AI preparedness.
- Governments should reduce obstacles to private enterprise and innovation—“eliminate self-inflicted injuries.”
- Rebalancing internal and external positions:
- Renew focus on internal balances (savings and investment) and external current account balances; fiscal, monetary, exchange rate, and structural policies are key levers.
- Internal rebalancing improves stability and reduces the risk of sudden stops to capital flows.
- Distributional policies:
- Cushion adjustment costs on those who lose out; distributional policies are essential to bridge good economics and good politics.
- Multilateral cooperation in a multi-polar world:
- In trade policy, seek a settlement among the largest players that preserves openness, restarts the global trend toward lower tariff rates, and reduces nontariff barriers and distortions.
- Allow private agents time to adjust to transitions; aim for a more resilient world economy rather than division.
Country-specific guidance and examples
- China:
- Advise policies to boost chronically low private consumption, including:
- Dial back industrial policies and pervasive state involvement in industry.
- Improve social safety nets to reduce precautionary savings.
- Provide fiscal support to address property sector weaknesses.
- Support a warmer transition from manufacturing to services as economies develop (Figure 12).
- European Union:
- Fiscal expansion by Germany to facilitate defense and infrastructure spending would lift domestic demand.
- EU-wide policies to improve competitiveness by deepening the single market, pursue banking union, pursue capital market union, and reduce restrictions on internal trade in services.
- United States:
- Core macro challenge: put federal government debt on a declining path.
- Achieving this requires significant reductions to the federal budget deficit, including elements of spending reform; lowering federal debt would strengthen resilience and reduce the current account deficit.
- Broader regions:
- From ASEAN to the Gulf Cooperation Council, across Africa and elsewhere, policymakers are taking actions to strengthen economies, improve regional ties, and reduce surpluses and deficits; these efforts are supported.
IMF role and closing
- The IMF will help countries manage macroeconomic adjustment and advance reforms.
- Currently, 48 countries are relying on IMF balance of payments support, including Argentina, where market-oriented reforms are underpinned by the IMF’s newest and largest program.
- Institutional forum:
- The upcoming Spring Meetings (a gathering of 191 IMF member countries) are expected to provide a vital forum for dialogue.
- Final message:
- Challenge contains opportunity: with cool heads, clear vision, and strong will, times of change can be times of renewal. Focus energy on building the new—a better balanced and more resilient world economy.
As prepared for delivery by Kristalina Georgieva, Managing Director, IMF, April 17, 2025.