Source : the age
By Alan Rappeport
US President Donald Trump’s trade war is expected to slow economic growth across the globe this year, in large part because his aggressive use of tariffs is likely to weigh heavily on the United States, the world’s largest economy.
The economic projections were released on Tuesday by the International Monetary Fund in the wake of Trump’s decision to raise tariffs to levels not seen since the Great Depression.
US President Donald Trump’s trade war is hurting the global economy.Credit: nnarmasters
The president has imposed a 10 per cent tariff on nearly all imports, along with punishing levies of at least 145 per cent on Chinese goods that come into the United States. Trump also imposed what he calls “reciprocal” tariffs on America’s largest trading partners, including the European Union, Japan, South Korea and Taiwan, although he has paused those until July as his administration works to secure bilateral trade deals.
Trump’s approach has created paralysing uncertainty for US companies that export products abroad or rely on foreign inputs for their goods, dampening output just as economies around the world were stabilising after years of crippling inflation. China and Canada have already retaliated against Trump’s tariffs with their own trade barriers, and the EU has said it is prepared to increase levies if the United States goes ahead with its planned 20 per cent tax.
The World Economic Outlook report projects that global output will slow to 2.8 per cent this year from 3.3 per cent in 2024. In January, the fund forecast that growth would hold steady in 2025.
The IMF also expects output to be slower next year than it previously predicted.
‘The global economic system that has operated for the past 80 years is being reset.’
IMF Chief Economist Pierre-Olivier Gourinchas
Much of the downgrade for this year can be attributed to the impact of the tariffs on the US economy, which was already poised to lose momentum this year. The IMF expects US output to slow to 1.8 per cent in 2025, down from 2.8 per cent last year. That is nearly a full percentage point slower than the 2.7 per cent growth that the IMF forecast for the United States in January, when it was the strongest economy in the world.
“The global economic system that has operated for the past 80 years is being reset,” Pierre-Olivier Gourinchas, the IMF’s chief economist, said in a briefing with reporters this week. “The US effective tariff rate has now surged past levels reached at the turn of the 20th century. Beyond the tariffs themselves, the surge in policy uncertainty — related to trade policy but also more broadly — is a major driver of the economic outlook.”
The IMF forecasts also make clear that the tariffs could complicate the efforts to keep inflation contained. The fund has raised its inflation forecast for the United States to 3 per cent from 2 per cent this year.
Gourinchas said on Tuesday that the increase in price pressures from the tariffs would likely be temporary in the US, but that the reduction in productivity and output would be permanent. Although the IMF is not projecting a recession in the US, the risk of such a downturn has increased to 40 per cent from 25 per cent in October.
Growth forecasts in China and Europe were also lowered, but the IMF suggested that fiscal support by their governments could help cushion the blow of the tariffs.
The IMF noted that its projections were subject to many variables that were hard to predict. The Trump administration has already delayed some of the tariffs that it imposed, and it is racing to negotiate trade deals with dozens of countries in hopes of scaling back the so-called reciprocal tariffs that it enacted April 2.
However, the world’s largest economies — the United States and China — appear to be locked in a protracted economic standoff that could weigh on the global economy until a deal is reached.
Trump has signalled that he is prepared to adjust his tariffs when markets become overly volatile, as they did earlier this month. However, he has given no indication that he intends to reverse course.
“We must rebuild the Wealth of our Great Country, and create true RECIPROCITY,” Trump wrote on his social media site, Truth Social, over the weekend. “But for those who want the easiest path: Come to America, and build in America!”
Fed jitters
In recent days, Trump has stepped up his public criticism of Jerome Powell, the Federal Reserve chair, who he accused of “playing politics” and moving too slowly to lower interest rates.
Asked about the possibility that Trump would try to remove Powell before the end of his term as chair next year, Gourinchas made the case that it is important for markets to believe that central banks will do what is necessary to keep inflation under control.
“So central banks need to remain credible, and part of that credibility is built upon their central bank independence,” he said. “And so from that perspective, it’s very important to preserve that.”
The IMF has warned for years that the fragmentation of the global economy and rising trade tensions could be a threat to productivity and global growth.
Gourinchas wrote in the report that the prospect that countries could raise their tariffs to even higher levels poses major risks to growth outlook for the world and for poorer countries in particular.
“The global economy showed surprising resilience during the severe shocks of the past four years and still bears significant scars,” Gourinchas said.
“It is now being severely tested once again, especially in emerging-market and developing economies with more limited buffers.”
This article originally appeared in The New York Times.
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