Global Economic Outlook Shows Modest Change Amid Policy Shifts and Complex Forces

IMF Blog, October 14, 2025

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Canonical URL: Global Economic Outlook Shows Modest Change Amid Policy Shifts and Complex Forces

Author: Pierre-Olivier Gourinchas
Date: October 14, 2025
Core message: Dialing down uncertainty, reducing vulnerabilities, and investing in innovation can help deliver durable economic gains amid modest growth downgrade and ongoing trade and supply shocks.

Current global growth projections:
- "We now project global growth at 3.2 percent this year and 3.1 percent next year."
- "a cumulative downgrade of 0.2 percentage point since our forecast a year earlier."
Factors limiting the tariff shock so far:
- US negotiated trade deals and multiple exemptions.
- Most countries refrained from retaliation, keeping the trading system largely open.
- Private sector adaptation: front-loading imports and re-routing supply chains.
- Result: "the increase in tariffs and its effect has been smaller than expected so far."
Ongoing sources of fragility:
- US statutory effective tariff rate remains high; trade tensions continue.
- Tariff incidence appears to fall on US importers; import prices (excluding tariffs) "mostly unchanged" with limited retail price increases so far.
- Other concurrent negative supply shocks (e.g., tighter US immigration reducing foreign-born labor supply).
- Offsetting demand-side forces: "Financial conditions remain loose, the dollar has softened in the first half of the year, and AI-driven investment is booming."
Regional dynamics cushioning impacts:
- China: "weaker real exchange rate, redirected exports to Asia and Europe, and fiscal support."
- Germany: "fiscal expansion is lifting euro area growth."
- Emerging market and developing economies: benefited from easier global financial conditions and US dollar depreciation; "continue to demonstrate strong resilience."

Main tariff-related risk:
- "The main risk is that tariffs may increase further from renewed and unresolved trade tensions, which, coupled with supply chain disruptions, could lower global output by 0.3 percent next year."
Four simmering downside risks:

1. The AI surge, promise or peril?

Parallels with the dot-com boom of the late 1990s: "surging investment in artificial intelligence" lifting investment, valuations, and consumption via capital gains.
Upside: could push the real neutral interest rate upwards; may raise total factor productivity.
Downside: market repricing if AI fails to meet profit expectations could "dent wealth and curb consumption" and affect the financial system.

2. China’s structural struggles

Property sector still fragile "four years after its property bubble burst."
"Financial stability risks are elevated and rising."
Real estate investment contracting, weak credit demand, risk of "debt-deflation trap."
Large-scale subsidies to strategic sectors may have "contributed to a significant overall misallocation of resources and lackluster aggregate productivity gains."

3. Mounting fiscal pressures

"Many governments, including some major advanced economies, face growing fiscal strains" with limited progress rebuilding fiscal space.
Risks from slower growth, higher real interest rates, elevated debt, and new spending needs (defense, economic security, climate).
"Low-income countries are especially vulnerable" with prospects of reduced aid flows and social unrest risks.

4. Institutional credibility at risk

Political pressures could erode central bank independence.
Risks: pressures to ease policy to lower debt servicing costs can backfire, ultimately increasing inflation and inflation expectations and undermining macroeconomic and financial stability.

Trade-policy and uncertainty resolution impacts:
- "Clearer and more stable bilateral and multilateral trade agreements can raise global output by 0.4 percent in the very near term."
- "A return to low tariffs that prevailed before January 2025 based on these agreements adds even more upside, about 0.3 percent."
Combined effects under modest assumptions:
- "the combined effects of lower uncertainty, lower tariffs, and AI could raise global output by about 1 percent in the near term."

Trade policy:
- Reduce uncertainty and set clear, transparent rules reflecting changing trade relations.
- Deepen trade ties where possible and aim to return to lower tariff levels that prevailed before January 2025.
Fiscal policy:
- "Where needed, fiscal policy should aim to reduce vulnerabilities."
- Implement gradual and credible fiscal consolidation; improve efficiency of public spending to encourage private investment.
Monetary policy:
- "Monetary policy should remain independent, transparent and tailored with a key objective to maintain price stability."
Structural and innovation policies:
- Invest in education, public research, infrastructure, governance, financial stability, and smart regulation that balances innovation with risk management.
- Empower private entrepreneurs to innovate; use AI with appropriate guardrails to lift medium-term prospects.
- Caution on sectoral industrial policies: they can boost targeted sectors but may bring "significant fiscal, hidden costs, and potential spillovers."
Multilateral cooperation:
- A "pragmatic and adaptive multilateral system that fosters cooperation" can help address the challenges and improve growth prospects.

—This blog is based on Chapter 1 of the October 2025 World Economic Outlook, “Global Economy in Flux, Prospects Remain Dim.”