On Tuesday, the International Monetary Fund (IMF) modestly raised its global growth predictions for 2025 and 2026, noting unexpectedly strong trade activity ahead of a scheduled hike in US tariffs and a recent decline in the effective US tariff rate.
However, the Fund warned that persistent trade policy uncertainty, growing fiscal deficits, and geopolitical concerns continue to jeopardise global economic recovery.
Global growth is now seen at 3% in 2025, 0.2 percentage points higher than previously forecast, and at 3.1% in 2026, 0.1 points stronger, the IMF said.
Yet both numbers are still lower than the 3.3% prediction released in January, and well below the 3.7% pre-pandemic average.
“The world economy is still hurting, and it’s going to continue hurting with tariffs at that level, even though it’s not as bad as it could have been,” said Pierre-Olivier Gourinchas, the IMF’s chief economist.
Tariff-driven surge masks underlying weakness
The mild uptick in growth outlook is mainly driven by pre-emptive buying as companies rushed to frontload orders to avoid a US tariff onset on August 1.
While the US tariff rate has decreased from a high of 24.4% to an effective rate of 17.3%, this is still a significant distance away from the 2.5% level as of January 3rd of this year.
For the rest of the world, the tariff rate has also come down to 3.5% from 4.1% in April, but uncertainties abound: Tariffs that have yet to be imposed, for example, on pharmaceuticals, lumber, and semiconductors, are not yet incorporated into IMF projections.
While the recent surge in activity is positive, it is unlikely to last, Gourinchas warned.
“That is going to fade away,” he said. “There is going to be payback for that front loading, and that’s one of the risks we face.”
Despite modest improvements, risks remain
The IMF stressed that the global economic outlook remains fragile, with risks leaning toward the downside.
It identified continuing trade disputes, high tariffs, and increasing fiscal deficits as factors that could raise interest rates and tighten global financial conditions.
Despite recent deals between the United States, Japan, and the European Union on new 15% tariffs, they were too late to impact the July prediction.
IMF staff simulations indicate that if the maximum tariffs indicated in recent months were imposed, global growth in 2025 may be 0.2 percentage points lower than the present prediction.
The IMF also observed that underlying economic activity in many regions appeared to be influenced more by trade policy distortions than by true strength.
Temporary gains from front-loading may fade
Trade volumes were temporarily bolstered by US businesses stocking up on imports before previously announced tariffs were set to be raised.
Nonetheless, the IMF anticipates this “massive amount” of front-loading to be unwound in the second half of 2025, weighing on growth well into 2026.
US inflation should remain elevated above target over this time due to the rates of transmittance from tariffs to consumer prices.
World inflation should decelerate to 4.2% by 2024 and 3.6% by 2026, but the US experience may have longer-lasting price pressure.
The outlook for US growth was raised slightly to 1.9% in both 2025 and 2026, lifted by a new tax cut and spending package.
According to IMF estimates, this has increased the US budget deficit by 1.5 percentage points, partly offset by tariff revenues.
Shifting trade dynamics weigh on the outlook
The IMF raised China’s 2025 growth prediction by 0.8 percentage points, citing better-than-expected performance in the first half of the year and a temporary truce with the United States that decreased tariffs.
Growth in 2026 is predicted to be 4.2%, up 0.2 percentage points.
In the eurozone, growth for 2025 has been revised up to 1%, owing partly to a strong increase in Irish pharmaceutical exports to the United States.
The 2026 forecast stays unchanged at 1.2%.
Emerging markets and developing economies are expected to rise by 4.1% in 2025 and 4.0% in 2026.
Meanwhile, the IMF upped its global trade growth prediction for 2025 to 2.6%, a 0.9 percentage point gain, but decreased the 2026 forecast to 1.9%, a 0.6 point decrease, reflecting the ephemeral nature of current trade activity.
One unexpected trend has been the weakening of the US dollar, which Gourinchas stated had not occurred during previous periods of trade dispute.
While a weaker currency eases financial circumstances in the United States, it increases the impact of tariffs on other economies.
In summary, while the global economy has shown resilience in the face of policy shocks, the IMF’s most recent report emphasises that uncertainty, particularly around trade, is likely to continue to weigh on investment, inflation, and long-term growth.
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