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The US is confronting an increased risk of recession as Donald Trump’s trade war pushes the global economy into a “significant slowdown”, the IMF has warned, with the fund’s top economist defending the Federal Reserve’s policy on interest rates.
In its latest World Economic Outlook, the fund lopped nearly a percentage point off its growth forecast for the US this year and downgraded its outlooks for all other G7 nations, as well as major economies including China, India, Brazil and South Africa.
Countries needed to “urgently resolve” their trade tensions to avoid further damage to growth prospects, the fund said. “If sustained, this abrupt increase in tariffs and attendant uncertainty will significantly slow global growth.”
Equities have slid in the US and other major markets this month as investors grapple with sharp increases in US trade barriers and uncertainty about Trump’s next move.
The sell-off resumed on Monday, carrying the dollar lower on fears that Trump will seek to remove US Federal Reserve chair Jay Powell from his post — threatening the Fed’s independence — as the president calls for immediate rate cuts.
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Pierre-Olivier Gourinchas, the IMF’s chief economist, said the fund’s central forecast was that the US and global economies would avoid recession this year, after entering 2025 with firm momentum. But the probability of a recession in the US had increased to nearly 40 per cent, Gourinchas said, compared with 25 per cent in its previous World Economic Outlook.
“The major risk in front of us is that there could be further escalation in tariffs and trade tensions,” he said in an interview. “There is also the risk of financial conditions tightening much further than they have.”
The tariffs will also feed through to higher inflation in the US, according to the IMF, with consumer prices set to grow 3 per cent this year, a full percentage point higher than expected.
Reiterating the fund’s argument that central bank independence is important to keep inflation in check, Gourinchas said the Fed was right to keep interest rates on hold as it weighs the impact of the levies. The IMF’s outlook assumes there will be two Fed rate cuts this year.
He added that extra trade barriers represented a supply shock that could “materially” affect goods prices in coming years.
“The Fed is sitting at this point and saying, ‘OK, how is this going to play out?’” Gourinchas said. “And waiting and figuring things out seems very appropriate.”
The outlook comes as economic policymakers from around the world gather in Washington for the IMF/World Bank spring meetings, which will be dominated by discussion of the global trade conflicts.
The IMF has cut its outlook for global growth by half a point to 2.8 per cent this year and trimmed its prediction for 2026 to 3 per cent. This is a slowdown from 2024’s rate of 3.3 per cent, as the IMF warns of the “major negative shock” of rising trade barriers.
IMF chief economist Pierre-Olivier Gourinchas said: ‘The major risk in front of us is that there could be further escalation in tariffs and trade tensions’ © Ken Cedeno/Reuters
The forecast incorporated US tariff announcements and countermeasures by other countries between February 1 and April 4 — before Trump announced a 90-day pause on most of his so-called reciprocal tariffs, while ratcheting up those on China. Of the G20 countries, only Turkey, Argentina and Russia saw growth upgrades.
The fund lowered its growth forecast for the US to 1.8 per cent in 2025 — down from its previous forecast of 2.7 per cent — and 1.7 per cent in 2026. That still leaves the country as the fastest-growing G7 economy this year and next, but it is sharply below America’s 2.8 per cent expansion in 2024.
“Intensifying downside risks dominate the outlook,” the fund said. “Broader financial instability may ensue, including damage to the international monetary system.”
Growth in Germany is now expected at zero this year, with an expansion of just 0.9 per cent in 2026, while the UK is set for 1.1 per cent growth this year and 1.4 per cent next.
China is also set for a slowdown, with the IMF predicting expansion of 4 per cent this year and next, compared with 5 per cent in 2024.
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The IMF outlined alternatives to its main “reference” scenario for the global economy.
But while one such alternative incorporates the 90-day pause to most of Trump’s so-called reciprocal tariffs, the fund concluded that, even if the duties were delayed indefinitely, it would not “materially change” the outlook set out in its reference forecast.
This is because of the magnitude of the trade barriers now being erected between the US and China — the world’s two biggest economies.
The negative impact of the barriers would not be confined to the near-term, the fund added. It expects tariffs to decrease competition and innovation in the longer term while increasing rent-seeking, “further weighing on the outlook”.
It added: “Growth prospects could, however, immediately improve if countries ease their current trade policy stance and forge new trade agreements.”
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