Growth uncertainties: IMF's assessment reflects the global chaos

Global uncertainties caused by the United States (US) trade policy have made the lives of economic forecasters and business planners enormously difficult. It is impossible to predict what will happen after the 90-day pause in implementing the so-called reciprocal tariffs ends. How many countries will the US be able to strike a trade deal with, and at what tariff level? If the US is unable to arrive at a deal, will more time be given for negotiations? And what will happen to the prohibitive tariffs on China? Numerous such unsettled questions will determine the pace of global growth, and that of individual countries. Some of these complexities are reflected in the International Monetary Fund’s (IMF’s) economic assessment in the latest World Economic Outlook (WEO), released on Tuesday.

 

The April edition of the WEO came up with three scenarios. The first is called the “reference forecast”, which is based on announcements as on April 4. The second one is with information till March, and the third one is a post-April 9 model-based forecast that quantifies the implications of the pause and additional concessions. Under the reference forecast, which is used to present the comparative numbers, global growth is projected to fall from 3.3 per cent in 2024 to 2.8 per cent in 2025 and is expected to recover to 3 per cent in 2026. Compared to the January update of the WEO, global growth is expected to be lower by 50 basis points in 2025. The growth forecast for the US has also been lowered by 90 basis points in 2025 to 1.8 per cent. A 40-basis-point reduction in the US growth projection is on account of tariffs, which is unlikely to please the American people or corporations. The projection for China has been cut by 60 basis points and it is expected to grow at 4 per cent in 2025. The impact on India is projected to be marginal. The Indian economy is expected to grow 6.2 per cent in the current year, 30 basis points lower than the January projection.

 

However, it is worth noting that the IMF’s latest projections have come when there is a high level of uncertainty. It is possible that the outcomes would be significantly different from these projections. The impact of higher US tariffs will not be limited to trade. The growth rate in global trade volumes is projected to decline from 3.8 per cent in 2024 to 1.7 per cent. The trade shock could fundamentally alter global supply chains, which are complex and have been created over many decades. Resources, thus, would have to be reallocated in potentially less competitive ways, which would affect overall productivity and growth. This could also lead to higher inflation. The US inflation rate projection has been revised upwards by about 100 basis points. This could change the policy choices of the US Federal Reserve. Federal Reserve Chairman Jerome Powell, in his remarks, had recently noted that the inflationary impact of tariffs could be persistent.

 

Besides imparting greater uncertainty to the inflation outlook, the US trade policy, depending on how it settles, could further increase volatility in the US financial markets and the value of the dollar. All this will affect capital flows and potentially tighten financial conditions. While it’s difficult to pinpoint with certainty how things will unfold, the world is unlikely to be a better place than it was at the beginning of the year. The growth impact on India as of now is expected to be limited. However, policy managers need to be alert to a variety of emerging threats and opportunities. As things stand, an early conclusion of the bilateral trade talks with the US is India’s best bet.