The better-than-feared global economy
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The global economy is surviving President Trump's trade wars with stronger-than-expected growth, the International Monetary Fund said in newly updated forecasts — even as a drag from fraying trade relations is likely to continue.
Why it matters: The group warns that the economy's shocking resiliency is underpinned by fleeting forces — not the type of durable trends that will spur further growth.
Driving the news: In its quarterly update of the World Economic Outlook, out Tuesday morning, the IMF says it expects the global economy to grow 3% this year, up 0.2 percentage point from its previous April forecast.
- That still amounts to a slowdown from last year's 3.3% growth and remains "disappointingly below pre-COVID average," chief economist Pierre-Olivier Gourinchas told reporters Tuesday morning.
- U.S. economic growth projections were revised up by a tick to 1.9%. Next year's growth was upgraded by 0.3 percentage point to 2%, reflecting an expected boost from tax incentives for corporate investment.
What they're saying: "This resilience is welcome, but it is also tenuous," Gourinchas said.
- "While the trade shock could turn out to be less severe than initially feared, it is still sizeable, and evidence is mounting that it is hurting the global economy."
The intrigue: The White House has taken a victory lap in recent weeks as economic data has surprised to the upside, defying gloomy predictions of an inflation shock and slowdown.
- But Wall Street economists say the outlook is brighter, in part, because the worst of the tariff threats has not materialized.
- The U.S. effective tariff rate that underpins IMF forecasts is roughly 17%, down from the more than 24% rate in the April forecast.
"[T]he global economy has continued to hold steady, but the composition of activity points to distortions from tariffs, rather than underlying robustness," IMF economists wrote in the report.
- "International trade and investment drove activity, while private consumption was more subdued across major jurisdictions," they added.
What to watch: Risks to the global economy remain "firmly to the downside," Gourinchas said, even as Trump announces a raft of trade frameworks.
- "Tariffs could well reset at much higher levels once the 'pause' expires on August 1 or if existing deals unravel," he added.
- The value of the greenback has rebounded in the wake of the U.S.-EU trade deal, though it has depreciated about 9% since the start of the year. The result is a smaller hit to the U.S. but an amplified shock for foreign nations.
The bottom line: The global economy faces meaningful risks ahead, but the outlook looks a notch better than it did in April.
