“This (new tariff measures by the US and countermeasures by trading partners) on its own is a major negative shock to (global) growth,” it said in the latest edition of the World Economic Outlook, the first since Donald Trump unveiled his tariff plan, currently paused for a 90-day period.
India’s growth outlook for 2025 remains “relatively more stable”, buoyed by private consumption, especially in rural areas, according to the Outlook. The projection, however, is lower than the RBI’s 6.5% for FY26.
The IMF’s growth projection for FY27 has also been lowered to 6.3% from 6.5%. India’s inflation is expected to fall to 4.2% in FY26 and further to 4.1% in FY27. Trump had announced the US reciprocal tariff plan on April 2, imposing a 26% levy on imports from India. He subsequently announced a 90-day pause until July 9, although the new baseline tariff of 10% remained in place.
Tariff turmoil
In a scenario marked by global divergence and trade conflict, the IMF predicts that tariffs could reduce world GDP by 0.6% by 2027 and 1% in the long term. The IMF projects global GDP growth of 2.8% in 2025, down from the earlier forecast of 3.3%.
“The swift escalation of trade tensions and extremely high levels of policy uncertainty are expected to have a significant impact on global economic activity,” it said.
It noted that the tariff measures and countermeasures, announced and implemented, have brought effective tariff rates to levels not seen in a century. If it weren’t for Trump’s April 2 announcement, global growth would have been pegged at 3.2% for both 2025 and 2026, lower by 0.1 percentage point, the IMF said.
China’s GDP growth forecast for 2025 has been downgraded to 4% from 4.6%. For the US, growth is projected to slow to 1.8% from 2.7% forecast in the January 2025 WEO update.
The IMF noted that countries directly impacted by new tariffs, particularly China and the US, would be the most affected. However, Asia and Europe would also feel the impact in the medium term.
“Some countries may harness the opportunity to consolidate their trade networks, reconfigure their position in global value chains, and, hence, experience positive effects, especially if traded goods embed a rising share of domestic value added,” it said.
The IMF also noted that the impact of tariffs on inflation across countries would depend on whether the tariffs are permanent or temporary, how firms adjust margins to offset increased import costs, and whether imports are invoiced in US dollars or local currency.
Rapidly changing policy positions could result in further asset repricing beyond the shifts observed after the announcement of US tariffs on April 2, as well as sharp fluctuations in foreign exchange rates and capital flows, especially in economies already struggling with debt issues, the IMF mentioned.
Policy prescription
“Our policy recommendations call for prudence and improved collaboration,” said IMF chief economist Pierre-Olivier Gourinchas.
He said the priority should be to restore a clear, stable and predictable trade environment. Monetary policy must remain agile; rebuilding fiscal buffers is crucial, and structural reforms remain needed, he added.
Content Source: economictimes.indiatimes.com