Global economic growth will be “lacklustre” but stable, the International Monetary Fund (IMF) has forecast in its latest World Economic Outlook.
A stronger performance by the US economy means its projections have been upgraded on the IMF’s previous forecast. The Washington-based think tank said on Friday that the wider global economy will grow by 3.3 per cent in both 2025 and 2026, with a 0.1 percentage point upgrade for this year.
“The big story is the divergence between the US and the rest of the world,” IMF chief economist Pierre-Olivier Gourinchas said in a briefing with reporters. Broadly, the US has recovered to its pre-pandemic growth potential, while the euro zone and China have not.
Risks to the global growth outlook are overall still tilted to the downside, the IMF report said, with the five-year ahead forecast at about 3 per cent.
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The analysis comes on the eve of Donald Trump’s second term as US president and ahead of his threat to impose blanket tariffs on all imports to improve the US’s trade balance with the rest of the world and to boost domestic manufacturing.
While the IMF said that most policies could be short-term positive for US and global growth, it added that they do carry some medium-term risks. “Uncertainties are high,” it said in the report.
Extending Mr Trumps’ first-term tax cuts, which expire this year, would bolster output, with even some “positive spillovers” globally. Yet over the longer term that might require larger pull-backs in fiscal policy “that could become disruptive”, it said.
It warned that an intensification of protectionist policies, for instance in the form of a new wave of tariffs, “could exacerbate trade tensions, lower investment, reduce market efficiency, distort trade flows and again disrupt supply chains”.
“Growth could suffer in both the near and medium term, but at varying degrees across economies,” it said.
US tariffs could result in a tit-for-tat trade war between the US and Europe, significantly impacting Ireland’s big export trade with the US.
In the euro zone, growth is expected to pick up but at a more gradual pace than anticipated in October, with geopolitical tensions continuing to weigh on sentiment, it said.
Weaker-than-expected momentum at the end of 2024, especially in manufacturing, and heightened political and policy uncertainty explain a downward revision of 0.2 of a percentage point to 1 per cent in 2025,” it said. In 2026, growth is set to rise to 1.4 per cent, helped by stronger domestic demand, as financial conditions loosen, confidence improves and uncertainty recedes somewhat, the fund said.
On inflation, the IMF said: “Inflation is declining, to 4.2 per cent this year and 3.5 per cent next year, in a return to central bank targets that will allow further normalisation of monetary policy.
“This will help draw to a close the global disruptions of recent years, including the pandemic and Russia’s invasion of Ukraine, which precipitated the largest inflation surge in four decades,” it said.
Additional reporting Bloomberg
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