US tariffs will weaken global economy and trigger inflation but not a global recession: IMF

Surging US tariffs are projected to weaken the global economy and increase inflation this year, according to forecasts set to be released next week by the International Monetary Fund (IMF).

Kristalina Georgieva, Managing Director of the IMF, stated on Thursday that the Trump administration’s sharp tariff hikes have caused a spike in global uncertainty. While the import taxes are expected to slow global growth, they are unlikely to trigger a worldwide recession, she added. The IMF’s detailed outlook will be published on Tuesday.

Georgieva remarked that the resilience of the global economy is being tested “by the reboot of the global trading system,” which threatens to create turbulence in financial markets. This turbulence has been evident for weeks, particularly on Wall Street, where markets have experienced erratic fluctuations.

The IMF chief echoed concerns raised by the Trump administration, urging countries to reduce tariffs and lower other trade barriers. She noted that progress in this area had stalled over the past decade after steady advancements following World War II.

“Trade distortions — tariff and nontariff barriers — have fed negative perceptions of a multilateral system seen to have failed to deliver a level playing field,” Georgieva said. “This feeling of unfairness in some places feeds the narrative: we play by the rules while others game the system without penalty.”

Georgieva emphasised that tariffs create uncertainty, which can be costly. She explained that due to the complexity of supply chains, tariffs imposed in multiple countries can significantly affect the cost of a single item.

She added that increased trade barriers tend to have an immediate impact on growth. While they may eventually lead to higher domestic production, this process takes time to implement.

In its January projections, the IMF forecast nominally faster global economic growth and a decline in inflation. However, it warned that the outlook was clouded by President Donald Trump’s policies, including tax cuts and increased tariffs on foreign imports.

The Washington-based lending agency had projected global economic growth of 3.3% for this year and next, up from 3.2% in 2024. Global inflation, which surged following the Covid19 pandemic, was forecast to decrease from 5.7% in 2024 to 4.2% this year and 3.5% in 2026.

In a blog post accompanying the January projections, IMF chief economist Pierre-Olivier Gourinchas wrote that Trump’s proposed policies “are likely to push inflation higher in the near term.”

These forecasts are expected to change significantly as Trump’s trade war with China has intensified in recent months. Trump has engaged in a tit-for-tat tariff battle with China, with Beijing retaliating each time the US raises tariffs on Chinese imports.

The IMF, a 191-nation lending organisation, aims to promote economic growth, financial stability, and poverty reduction worldwide. 

By RSS/AP