Global economic outlook remains brittle with trade tensions and other supply chain shocks, causing a projected growth slowdown of 3.2 percent in 2025 and 3.1 percent in 2026, according to Pierre-Olivier Gourinchas.
The Director of Research Department, IMF mentioned that recent developments could brighten the outlook but requires policy makers to adhere to strict fiscal discipline and the adoption of specifically tailored policies to improve future investment and empower private sector participation.
“The growth downgrade is at the modest end of the range, with growth projected at 3.2 percent this year and 3.1 percent next year, while inflation has increased modestly and is proving more persistent.
“While these risks are serious, all is not gloomy. A few important developments could quickly brighten the outlook.”
Pierre-Olivier Gourinchas, Director of Research Department, IMF
According to the IMF’s Director of Research, tariff shock was smaller than projected as countries did not retaliate. This kept the trade system opened. Retaliation could reduce or shut down global trading system.
Trade Tensions
The U.S. trade war with other countries began in April 2025. While the tariff reduced for most countries, that of China’s persisted longer. The negative impact of the trade war cannot be overestimated as it further heightens global policy uncertainty.
Mr Gourinchas revealed that, the non-retaliation from other countries, the private sector “front‑loading imports and rerouting supply chains,” loose financial conditions due to weaker dollar, fiscal policy expansionary by some countries, and the U.S. “AI‑ and tech‑driven investment” boom was unable to discredit the negative impact of tariff shocks.
“Despite all these offsets, the tariff shock is here, and it is further dimming already weak growth prospects. This is clear even in the U.S. Growth is revised down from last year. The labour market is weakening. And inflation has been revised up and is persistently above target, signs that the economy has been hit by a negative supply shock.
“The outlook remains fragile and very sensitive to news on the trade front. Flaring up trade tensions, with a potential for supply chain disruptions, could quickly lower global output by as much as 0.3 percentage points, as we explore in our downside scenario.”
Pierre-Olivier Gourinchas, Director of Research Department, IMF
Other Supply Shocks
The Director pointed out other downside risks to the global economy.
Mr Gourinchas revealed that “there are echoes in the current tech investment surge of the dot‑com boom of the late 1990s.” Growth is seen in valuations, investment, and consumption on the back of growing AI. This requires constricted Monetary policy to contain price pressures. A successful price control mechanism was not achieved in the 1990s causing prices to change sharply. This threat he says “would reduce wealth, consumption, and investment, lower activity, and could spill over to broader financial conditions.”
He again remarked that China’s growth model continues to be a global concern. According to him, “the bubble in the property sector remains a source of weakness.” China’s export growth in recent years, he added, is increasingly unsustainable. Closeness to debt deflation trap, is also a concern. Though investment in strategic sectors like solar panels and electric vehicles is a significant gain, it is characterized by misallocation of resources due to reduced aggregate gains. The IMF believes industrial policies can boost productivity, but “brings significant fiscal and hidden costs and potential negative spillovers.”
Another downside risk mentioned by Mr Gourinchas was that “in too many countries, insufficient progress has been made to rebuild fiscal space.” According to him, lower growth, higher real interest rates, elevated debt levels, and new spending needs on defense, economic security, or climate adaptation has put countries at risk. With the current global economic stands, the prospect of reduced aids for low income countries is evident. This, he said, could “morph into social unrest, particularly among unemployed youth.”
There is mounted pressures on central banks as fiscal constraints become more binding, according to the IMF. The calls to ease monetary policies and reduce government debt servicing affects price stability. As a result, Mr Gourinchas calls for confidence building in the central banks.
“As trust erodes, inflation and inflation expectations always rise, macroeconomic stability deteriorates, and everyone loses out. This is a lesson that countries — advanced and emerging alike — have learned the hard way. Let’s not forget it.”
Pierre-Olivier Gourinchas, Director of Research Department, IMF
For emerging market and developing economies (EMDEs), the weak outlook restricts their capacity to enhance employment creation and shrink extreme poverty. Reduced Foreign Direct Investment (FDIs) from developed economies to EMDEs adds to the challenge.
The global trade environment requires collaboration from all economies for a restored stability. Further, fragile and vulnerable economies need support, especially those in conflict regions.
Fiscal and macroeconomic risks require a critical second look. Fiscal resilience being experienced needs to be braced. Economic institutions also require attention and reforms to unlock employment creation and improve private participation.
Therefore, policy uncertainty on trade must be resolved, improve domestic policy to support AI potentials, and restore fiscal space and spending efficiencies to improve global economic outlook.
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