MNI: IMF Slashes Growth Outlook, Says CenBank Independence Key

The IMF has slashed 2025 global GDP forecasts on U.S. tariff threats it says raises the chance America falls into recession and inflation surges, while that noting central bank independence is vital to stability.

"Intensifying downside risks dominate the outlook. Ratcheting up a trade war, along with even more elevated trade policy uncertainty, could further reduce near- and long-term growth, while eroded policy buffers weaken resilience to future shocks," it said in its World Economic Outlook. 

Its forecast for global growth this year was lowered 0.5pp to 2.8% including a 0.9pp reduction in the U.S. to 1.8%. The risk of a U.S. recession this year is 37% and the chance inflation rises above 3.5% is more than 30%, up from 13% in the IMF's October forecast. (See: MNI INTERVIEW:Tariffs Freeze Fed, Court Global Recession-Fatas)

While higher inflation boosts the odds the Federal Reserve will need to tighten policy, other central banks must remain nimble against competing risks from faster inflation and slower economic growth, the IMF said. "In all cases, credibility of the monetary policy framework—and its cornerstone, central bank independence—will remain key."

Governments facing debt burdens elevated through the pandemic face pressure to do more in a deep trade war and "the experience of the past four years suggests that it is easier to open the tap of fiscal support than to close it," the report said. 

The baseline outlook was based on information up to Donald Trump's sweeping global tariffs earlier this month but not the subsequent pause and higher tariffs on China. "This pause, even if extended indefinitely, does not materially change the global outlook compared to the reference forecast. This is because the overall effective tariff rate of the United States and China remains elevated even if some initially highly tariffed countries will now benefit, while policy-induced uncertainty has not declined," Economic Counsellor Pierre-Olivier Gourinchas said in a blog.

China's growth outlook was lowered 0.6pp to 4.0%. Other nations targeted by Trump saw major growth downgrades, with Mexico down 1.7pp meaning GDP shrinks 0.3% this year, and Canada's growth was reduced 0.6pp. Global trade volume growth was reduced 1.5pp to 2.5%. 

Other highlights:

• "The federal funds rate is projected to be down to 4% at the end of 2025 and reach its long-term equilibrium of 2.9% at the end of 2028. In the euro area, 100bps in cuts are expected in 2025 (with three cuts having already occurred this year), representing two more 25bp cuts than in the assumptions underlying the October 2024 WEO, bringing the policy rate to 2% by the middle of the year. In Japan, policy rates are expected to be lifted at a similar pace as assumed in October 2024, gradually rising over the medium term toward a neutral setting of about 1.5%."
• "The US, as the tariffing economy, may see its currency appreciate, as happened in previous episodes. This reflects the reduced demand for foreign currency as the demand for imports declines, but also the likelihood that tariffed countries may ease their monetary policy stance to respond to the negative demand shock. However, greater policy uncertainty, lower growth prospects in the US, and an adjustment in the global demand for dollar assets—which has been orderly so far—can weigh on the dollar, as we saw in the immediate aftermath of the announcements. In the medium term, the dollar may depreciate in real terms if tariffs translate into lower productivity in the US tradables sector."
• "Mitigating disruptive foreign exchange volatility may require targeted interventions."
• "Inflation expectations now exceed central bank targets in most advanced economies as well as emerging market and developing economies."
• "Under current policies, US public debt fails to stabilize, rising from 121% of GDP in 2024 to 130 percent of GDP in 2030. These projections do not incorporate measures that remain under discussion at the time of publication, notably, the net expansionary US budget resolution (currently, most provisions under the Tax Cuts and Jobs Act are assumed to expire at the end of 2025)."