Weak IMF Forecast: Global Economy Faces Tariff Shock

The International Monetary Fund (IMF) has significantly revised its growth forecasts, indicating that the global economy is struggling under the weight of escalating tariffs. The IMF's latest predictions indicate that global growth will be just 2.8% in 2025, down from an earlier estimate of 3.3% made in January. This marks the weakest growth outlook since the COVID-19 pandemic and the 2008 financial crisis.

In particular, the German economy is projected to stagnate this year, with growth expected to be a mere 0.9% next year, making it the slowest-growing major industrialized nation. The United States is anticipated to experience a significant downturn as well, with growth expected at only 1.8% instead of the previously forecasted 2.7%.

China's economy is expected to grow by 4% in both this year and the next, a reduction from earlier estimates of approximately 4.5%. The global economy, as per the IMF's assessment, is facing its weakest growth in two decades, only matched during the financial crisis of 2009 and the pandemic.

However, these projections come with caveats. They reflect tariff measures imposed by the Trump administration only up to April 2. The continued escalation of trade tensions between the U.S. and China, including the recent suspension of reciprocal tariffs, has not been fully incorporated into these predictions. The IMF's chief economist, Pierre-Olivier Gourinchas, stated that even under the current trade scenario, global growth remains at a historically low rate of 2.8%. Furthermore, the IMF forecasts that global trade growth will halve from 3.8% to 1.7%.

The Eurozone is undergoing a recovery phase, yet domestic demand remains subdued. Consumer sentiment is low, leading to increased savings and suppressed consumption growth. Germany, however, is making efforts to stimulate domestic demand by suspending its debt brake and increasing spending on defense and infrastructure projects. Despite these measures, production remains weak due to ongoing high energy prices.

Germany faces unique challenges; despite experiencing economic growth from 2020 to 2024, its GDP per capita has decreased during this period. This trend is similar to Canada, where productivity growth among industrial nations, excluding the U.S., has been declining for years due to insufficient investment.

In contrast, the U.S. has seen robust productivity growth, attributed partly to job changes during the pandemic that have led to increased efficiency. European countries, on the other hand, have focused on retaining workforce levels rather than optimizing productivity.

The services sector has been the main driver of growth in the Eurozone, with Spain notably achieving a growth rate of 2.5% this year, largely due to a thriving tourism industry, while the industrial sector remains comparatively weak.

It is important to note that tariffs are not the sole factor hindering economic growth. The IMF highlights unprecedented levels of uncertainty, which vary by country depending on their exposure to protectionist policies. This uncertainty is particularly impactful at a time when global economic momentum is already slowing.

China is grappling with its own internal issues, including a struggling real estate sector and its effects on local government finances, which have dampened domestic demand despite government efforts to counteract these trends. Consumer confidence in China, which had closely mirrored global trends for a decade, took a hit in early 2022 and has yet to recover. The increasing trade tensions have disproportionately affected China's economy, complicating its shift from an investment-led growth model to one focused on consumption.

In the lead-up to the U.S. elections in November 2024, the dollar appreciated significantly as markets anticipated stronger growth and tighter monetary policy in the U.S. However, since February 2025, the dollar has lost much of its gains from the previous quarter, reflecting weaker growth prospects and rising uncertainty. Typically, one would expect the dollar to strengthen in response to high tariffs.