IMF Warns Negative Supply Shock Incoming, Forecasts ‘Significant Slowdown’ of Global Economy

The International Monetary Fund (IMF) is forecasting a downturn for the global economy, largely driven by tariff-induced uncertainties.

In its new World Economic Outlook Report, the IMF says that after enduring a “prolonged and unprecedented series of shocks,” the global economy appears to have stabilized.

However, the IMF says the world’s financial landscape now faces significant risks as “uncertainties have climbed to new highs” due to President Trump’s threat to impose historically high tariff rates.

Trump’s tariff agenda has prompted the IMF to revise “markedly” its forecasts for global growth compared to its last update in January.

“For this reason, we expect that the sharp increase on April 2 in both tariffs and uncertainty will lead to a significant slowdown in global growth in the near term. While this is our central scenario— or ‘reference forecast’ — many possible paths exist, reflecting the unpredictability surrounding future trade policy and the varied impact of tariffs across different countries through a diverse set of channels…

The common denominator, however, is that tariffs are a negative supply shock for the economy imposing them, as resources are reallocated toward the production of noncompetitive goods, with a resulting loss of aggregate productivity, lower activity, and higher production costs and prices. Moreover, in the medium term, by reducing competition, tariffs increase the market power of domestic producers, decrease incentives to innovate, and create multiple opportunities for rent seeking. For trading partners, tariffs constitute mostly a negative external demand shock, driving foreign customers away from their products, even if some countries could benefit from the rerouting of trade flows.”

In anticipation of potential disruptions, the IMF says it has revised down its projection for global trade growth by 1.5%, with a “slight recovery” forecasted for next year.

 

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