Uncertainty continues: IMF highlights risks beyond trade, investment

Uncertainty related to the United States (US) trade policy continues to dominate the global economic discourse. The October edition of the World Economic Outlook (WEO),  released on Tuesday by the International Monetary Fund (IMF), noted that the downside risks to global growth had reduced since April, but they remained elevated. The focus is now shifting to the impact of tariffs on prices, consumption, and investment. The IMF has increased the US growth projection by 10 basis points to 2 per cent for the current year compared to its July update. India’s growth projection has also been revised up by 20 basis points to 6.6 per cent for the current year. Several other forecasters have also revised India’s growth projection owing to the better than expected growth outcome in the first quarter.

 

However, given the uncertainty, minor revisions in growth projections may not matter much. The US has imposed a prohibitive 50 per cent tariff on its imports from India. Indian negotiators are reported to be heading to the US this week, and it is hoped that both countries will soon arrive at a mutually beneficial trade agreement. While US tariffs on India are comparatively high, it is not the only one dealing with the uncertainty. As the WEO noted, higher US tariffs are curtailing external demand with significant implications for large exporting economies. Uncertainty on trade policy is affecting investment appetite in firms. Evidence shows that one standard-deviation increase in uncertainty on policy results in a 2 per cent drop in investment, which peaks about two years after the shock. Firms tend to defer investment because of uncertainty.

 

It is worth noting that tariffs are not the only uncertainty. Policy changes related to immigration, for instance, will also affect growth in both advanced and low-income countries. According to estimates, about a quarter of international migrants in the workforce are in North America, largely in the US. Policy shifts on immigration in the US could have a material impact on output. Further, sectors dominated by migrant workers — such as construction, hospitality, and farming — may see relatively high inflation. The overall inflation rate in the US is expected to increase, which could be a risk for the expected easing of monetary policy by the Federal Reserve.

 

The global economy is projected to grow at an average annual rate of 3.2 per cent between 2027 and 2030, as against the pre-pandemic (2000-19) average of 3.7 per cent. A lot in the medium term will depend on how issues on global trade are settled. Trade tensions between the US and China, for instance, are again increasing. So far, most trading partners have decided not to retaliate against the US. However, given the unrealistic conditions in some of the agreements and shifts in the US stance, things could change quickly. Economists at the World Trade Organization recently increased the growth forecast on merchandise trade for 2025 to 2.4 per cent compared to 0.9 per cent in August, which was largely driven by the frontloading of imports in North America. However, the growth projection for 2026 has been lowered to 0.5 per cent, as against the earlier forecast of 1.8 per cent. Growth in exports of services is expected to slow to 4.4 per cent in 2026 from 6.8 per cent in 2024. The uncertainty and trade frictions introduced by the US will affect not only trade in goods but also services and investment. While India continues to engage with the US, it should also aim to quickly conclude other agreements, such as the one with the European Union.