IMF Warns: New Era of Economic Uncertainty as Tariffs Surge

COLOMBO (News 1st); The International Monetary Fund has pointed out that the global economic system under which most countries have operated for the last 80 years is being reset, ushering the world into a new era.

Since late January, the U.S. has imposed tariffs on key trading partners, including Canada, China, and Mexico, culminating in near-universal levies by April 2. This surge in tariffs has pushed the U.S. effective tariff rate to levels not seen since the Great Depression, prompting retaliatory measures from major economies and escalating global trade tensions.

The immediate impact of these tariffs is a substantial slowdown in global economic growth.

The latest World Economic Outlook (WEO) report forecasts a reduction in global growth to 2.8 percent this year and 3 percent next year, a cumulative downgrade of 0.8 percentage points from the January 2025 update.

This downturn is primarily driven by the heightened uncertainty and policy unpredictability that have emerged from the abrupt increase in tariffs.

In the United States, the economic outlook has dimmed considerably. The WEO report has lowered the U.S. growth estimate for this year to 1.8 percent, a significant drop of 0.9 percentage points from January. Tariffs alone account for 0.4 percentage points of this reduction. Additionally, U.S. inflation is expected to rise by about 1 percentage point, reaching 3 percent.

China, another major player in the global economy, is also feeling the strain. The WEO report has revised China's growth forecast down to 4 percent, a 0.6 percentage point reduction, with inflation expected to decrease by 0.8 percentage points. The euro area, while facing relatively lower effective tariffs, is not immune to the fallout. Growth in the euro area is projected to decline by 0.2 percentage points, settling at 0.8 percent.

Emerging market economies are particularly vulnerable to the ripple effects of these trade disruptions. The growth forecast for this group has been lowered by 0.5 percentage points, to 3.7 percent. The intricate web of global supply chains means that the impact of tariffs can propagate widely, affecting multiple sectors and regions.

Despite these challenges, the global economy is not on the brink of recession. Global inflation is expected to rise slightly, but the disinflation momentum continues. However, global trade growth is projected to dip more than output, with a significant downward revision to 1.7 percent for 2025.

The increased uncertainty and tightening financial conditions are likely to dominate the short-term economic landscape. Companies facing uncertain market access may reduce investment and cut spending, while financial institutions reassess borrowers' exposure. This environment could lead to a sharp decline in oil prices and further weigh on economic activity.

The report by the IMF pointed out that the effect of tariffs on exchange rates is complex.

"The United States, as the tariffing country, may see its currency appreciate as in previous episodes. However, greater policy uncertainty, dimmer US growth prospects, and an adjustment in the global demand for dollar assets—that has so far been orderly—can weigh down on the dollar, as we saw since the tariff announcements. In the medium term, the dollar may depreciate in real terms if the tariffs translate into lower productivity in the US tradable goods sector, relative to its trading partners," said the IMF.

The WEO report emphasizes the need for prudent policy measures and improved international cooperation to navigate these turbulent times.

Restoring trade policy stability and forging mutually beneficial arrangements are crucial steps to mitigate the negative impacts of the current trade tensions. Additionally, countries must address domestic imbalances and invest in infrastructure and technological advancements to support long-term growth.