Despite the resilience shown by the global economy, the impact of Trump's tariffs is a story that's far from over, and the future looks uncertain. The International Monetary Fund (IMF) has issued a warning, stating that while the economy has withstood the initial shock, the long-term effects are yet to unfold.
As policymakers convene in Washington, the IMF has revised its global GDP growth forecast for this year to 3.2%, a slight improvement from its previous estimate. However, the organization remains cautious, with an unchanged forecast of 3.1% for next year.
The UK's economic growth outlook has also seen a modest increase, from 1.2% to 1.3% this year. Yet, there's a slight downgrade for the following year, also to 1.3%.
But here's where it gets controversial... The IMF suggests that the impact of tariffs has been somewhat masked by households and businesses rushing to beat their introduction. This rush has created a temporary boost, but the real consequences are only now starting to surface.
And this is the part most people miss... The Fund highlights the slow-burn effect of Brexit, indicating that dramatic policy shifts, like Trump's tariffs, can take time to fully impact investment decisions.
"Business investment continued to grow immediately after the UK's withdrawal from the EU, but it started to decline steadily from 2018 onwards," the IMF report states.
The report further points to several global concerns, including the potential impact of Washington's immigration crackdown on US growth, the risk of a stock market correction, and the fact that the full effects of tariffs are only now becoming apparent.
"Looking past the resilience, the global outlook remains dim, both in the short and long term," the IMF warns.
In particular, the Fund highlights the potential impact of Trump's immigration policies on the US economy. It estimates that US GDP could decrease by 0.3% to 0.7% as a result, with industries heavily reliant on immigrant labor facing increased inflationary pressures.
The report also echoes concerns raised by the IMF's managing director, Kristalina Georgieva, about the potential for a "correction" in share prices if markets reassess the gains from generative AI.
The IMF points to "stretched valuations" as a sign that investors have been relatively unmoved by recent policy turbulence. It warns that a drop in share prices could lead to a sharp decline in aggregate investment, especially considering the recent significant contribution of investment in datacenters and AI to overall growth.
Responding to the improved UK growth forecast, Chancellor Rachel Reeves stated, "This is the second consecutive upgrade to this year's growth forecast from the IMF. It's no surprise, as Britain led the G7 in growth during the first half of this year, and average disposable income has increased by £800 since the election."
Over the year, the IMF expects the UK to be the second-fastest-growing economy in the G7, behind the US, with GDP growth of 2%. However, it predicts that inflation in the UK will be the highest in the G7 in 2025 and 2026, averaging 3.4% in 2025, up from its previous prediction of 3.2%.
IMF Chief Economist Pierre-Olivier Gourinchas expressed concerns about the UK's inflation outlook, stating, "We expect it to moderate, but there are risks, and we see some upside potential." He highlighted strong wage growth and increased expectations of future inflation as potential drivers of continued inflationary pressures.
When asked about rising yields on UK government bonds, Gourinchas suggested that global factors were primarily responsible, adding, "We are not seeing major risks there."
The story of Trump's tariffs and their impact on the global economy is a complex and evolving one, with many potential outcomes still to unfold. It's a narrative that will continue to shape economic policies and decisions in the years to come.
