The Global Economy Enters a New Era
IMF Blog, April 22, 2025
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Bibliographic details
- Authors: Pierre-Olivier Gourinchas
- Published: April 22, 2025
Overview and context
- The global economic system that prevailed for the last 80 years is being reset; existing rules are challenged while new ones are yet to emerge.
- Since late January, a flurry of tariff announcements by the United States began with Canada, China, Mexico and critical sectors, culminating with near universal levies on April 2.
- The US effective tariff rate surged past levels reached during the Great Depression while counter-responses from major trading partners significantly pushed up the global rate.
- The resulting epistemic uncertainty and policy unpredictability is a major driver of the economic outlook; if sustained, the abrupt increase in tariffs and attendant uncertainty will significantly slow global growth.
Forecast scenarios and key statistics
- Reference forecast (includes tariff announcements between February 1 and April 4 by the US and countermeasures by other countries):
- Global growth: 2.8 percent (2025) and 3 percent (2026).
- Cumulative downgrade relative to January 2025 WEO update: about 0.8 percentage point.
- Alternative path (pre-April 2 forecast, excluding the April tariffs):
- Global growth: 3.2 percent for 2025 and 2026.
- Cumulative downgrade relative to January 2025 WEO update: 0.2 percentage point.
- Model-based forecast incorporating announcements after April 4 (United States temporarily halted most tariffs while raising those on China to prohibitive levels):
- This pause does not materially change the global outlook compared to the reference forecast because overall effective tariff rates remain elevated and policy-induced uncertainty has not declined.
- Inflation and trade:
- Global inflation is revised up by about 0.1 percentage point for each year, yet disinflation momentum continues.
- Projected global trade growth: 1.7 percent in 2025 (a significant downward revision since January 2025 WEO Update).
- Despite the slowdown, global growth remains well above recession levels.
Country and regional impacts
- United States:
- Growth estimate for 2025 lowered to 1.8 percent.
- This is 0.9 percentage point lower than January 2025, with tariffs accounting for 0.4 percentage point of that reduction.
- US inflation forecast raised by about 1 percentage point, up from 2 percent.
- China:
- Growth forecast for 2025 lowered to 4 percent, a 0.6 percentage point reduction.
- Inflation revised down by about 0.8 percentage point.
- Euro area:
- Growth revised down by 0.2 percentage point, to 0.8 percent.
- Noted to be subject to relatively lower effective tariffs and to receive some support from stronger fiscal stimulus.
- Emerging market economies (group):
- Growth forecast lowered by 0.5 percentage point, to 3.7 percent.
- Many emerging market economies could face significant slowdowns depending on where tariffs settle.
Transmission channels and risks
- Tariffs act as a negative supply shock for the implementing jurisdiction: resources reallocated toward less-competitive items, with aggregate productivity loss and higher production prices.
- For trading partners, tariffs are mostly a negative demand shock by driving foreign customers away, though some countries may benefit from trade diversion.
- Dense global supply chains magnify effects: most traded goods are intermediate inputs crossing borders multiple times, so disruptions can propagate with large multiplier effects.
- Businesses facing uncertain market access will likely pause, reduce investment, and cut spending; financial institutions will reassess borrower exposure.
- Increased uncertainty and tightening financial conditions could dominate the short term, as reflected in the sharp decline in oil prices.
- Exchange rate dynamics:
- The United States may see its currency appreciate as in previous episodes, but greater policy uncertainty, dimmer US growth prospects, and an adjustment in global demand for dollar assets can weigh on the dollar (as observed since the tariff announcements).
- In the medium term, the dollar may depreciate in real terms if tariffs translate into lower productivity in the US tradable goods sector relative to trading partners.
- Financial risks:
- Risks to the global economy have increased; worsening trade tensions could further depress growth and tighten financial conditions.
- While banks remain well capitalized overall, financial markets may face more severe tests.
- Fiscal risks and vulnerabilities:
- Fiscal authorities face starker trade-offs with high debt, low growth and rising financial costs.
- Most countries still have too little fiscal space and need gradual and credible consolidation plans.
- Some of the poorest countries, hit with reduced official aid, could experience debt distress.
- New spending needs increase fiscal fragilities; support should remain narrowly targeted and incorporate automatic sunset clauses.
Policy recommendations and priorities
- Restore trade policy stability and forge mutually beneficial arrangements:
- Priority is to restore a clear and predictable trading system addressing longstanding gaps, including pervasive non-tariff barriers and other trade-distorting measures.
- Improved cooperation is required to achieve this.
- Monetary policy:
- Monetary policy should remain agile.
- Some countries may confront steeper trade-offs between inflation and output; others may face negative demand shocks warranting lower policy rates.
- Countries with resurgent price pressures will require forceful monetary tightening.
- Monetary policy credibility and central bank independence remain cornerstones.
- Exchange rate and external adjustment for emerging markets:
- Let currencies adjust when driven by fundamental forces, per the Integrated Policy Framework, and follow the framework’s specific conditions for intervention.
- Fiscal policy guidance:
- Most countries should implement gradual and credible consolidation plans where necessary.
- For new spending needs (including defense-related spending in some countries), financing guidance:
- For countries with sufficient fiscal space, only the temporary part of additional spending should be financed by debt.
- For other countries, new spending should be offset by spending cuts elsewhere or new revenues.
- Targeted support for those at risk of severe dislocation should be narrowly targeted and time-limited.
- Structural and growth-enhancing policies:
- Engage in fiscal and structural reforms to mobilize private resources and reduce resource misallocation.
- Invest in digital infrastructure and training necessary to benefit from new technologies such as artificial intelligence.
- For Europe specifically: spend more on infrastructure to accelerate productivity growth.
- For China: boost support for domestic demand.
- For the United States: step up fiscal consolidation.
Structural considerations and social implications
- The decline in manufacturing employment in advanced economies reflects technological progress and automation more than globalization; the output share of manufacturing has remained stable in countries running trade surpluses (like Germany) or deficits (like the United States).
- Technological progress and globalization are ultimately beneficial but can be very disruptive to individuals and communities.
- Policymakers must think beyond compensating transfers between “winners” and “losers” and better understand root causes to build an improved trading system that delivers more opportunities.
- Global integration is a means to an end: important insofar as it supports improved living standards for all.
—This blog is based on Chapter 1 of the April 2025 World Economic Outlook, “Policy Uncertainty Tests Global Resilience.”