Global growth outlook improves, but tariff uncertainty creates significant downside risks

In its latest World Economic Outlook update, the International Monetary Fund (IMF) has revised upward its forecasts for global growth this year and next year. Growth this year was increased by 0.2 percentage points to 3.0 %, and rises by 0.1 percentage points next year to 3.1 %. The upward revision reflects lower-than-expected US import tariff increases and weakness of the dollar. According to the IMF, the effective US tariff rate fell from 24.4% in its April forecast to 17.3 %. The updated forecast was particularly affected by the US-China interim agreement allowing more time for trade talks, along with a pause in implementation of the highest tariff rates threatened by the US until August 1. The IMF also raised its growth forecast for China and the United States. The IMF sees the Chinese economy growing by 4.8 % this year and 4.2 % next year. The forecast numbers improved from the April forecast by 0.8 and 0.2 percentage points, respectively, as growth of the Chinese economy this year has been higher than expected despite the tariff situation. The US growth outlook was also lifted to 1.9 % this year and 2.0 % next year (1.8 % and 1.7 %, respectively, in the April forecast).

The IMF reports that global inflation remained largely unchanged, while core inflation fell below 2 %. The IMF expects global inflation of 4.2 % this year and 3.6 % next year. The variations in inflation across countries are quite large, however. For example, the IMF sees tariffs raising US consumer prices in the second half of this year, while the inflation outlook for China remains largely unchanged. For the rest of the world, the IMF expects inflationary pressures to ease as a result of the negative demand shock from tariffs. According to the IMF updated forecast, the volume of global trade should rise by an additional 0.9 percentage points in 2025, and then fall by 0.6 percentage points in 2026. Anticipation of tariffs boosted global trade growth in the first half of this year as firms scrambled to build up their inventories before the potential arrival of the new tariff regime. As higher tariffs come into force, the IMF expects the volume of trade to decline in the second half of this year and next year.

The downside risks to growth in these forecasts mainly relate to heightened uncertainty and geopolitical tensions. The IMF forecasts are based on trade policy circumstances arising from existing tariff levels and pauses. As the US makes good on its tariff threats this month, higher tariff levels will depress the global growth outlook. At the time of the IMF update, president Trump had twice postponed implementation of global tariffs.