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Agility has mitigated an initial tariff shock, but “dim prospects” persist, IMF warns

 

By Carly Fields

 

The world economy has successfully avoided the initial, catastrophic blow from the recent surge in trade protectionism, yet the long-term outlook remains "insufficiently bright”, according to the latest World Economic Outlook report from the International Monetary Fund. 

Acting as a global policy bellwether, the IMF has delivered a sombre assessment, highlighting the tension points of divergent national policies and lingering risks.

The defining shock of the past six months was the imposition of "sizable tariffs" by the US against its trading partners—a move noted by the IMF as a "major departure from trade policy rules and norms". When these policies were first announced, the IMF had offered a range of potential outcomes, from modest to significant, regarding the downward revision in global growth. Six months on, the damage remains "at the modest end of the range", according to the IMF.

This immediate mitigation of the shock is attributed not to a reversal of policy, but to the remarkable "agility” of the private sector, which managed to reorganise supply chains on the fly. Global businesses "front-loaded imports in the first half of the year and speedily reorganised supply chains to redirect trade flows", noted the IMF. Furthermore, a broader commitment to stability helped, as the world displayed "overall restraint… which by and large kept the trading system open".

As a result, global growth projections currently stand at 3.2% this year and 3.1% next year.

However, any celebratory conclusion that the tariff shock has had no lasting effect would be "both premature and incorrect”, the IMF cautioned. The shadow cast by protectionism is long and will likely deepen. The US effective tariff rate remains high (at about 19%), and “trade tensions continue to cast a shadow over the global economy, with trade policy uncertainty remaining high". 

 

“Premature and incorrect”

In a blog, IMF’s economic counsellor and director of research, Pierre-Olivier Gourinchas said to conclude that the shock triggered by the tariff surge had no effect on global growth would be “both premature and incorrect”.

He explained it would be premature because the “US statutory effective tariff rate remains high and trade tensions continue to flare up with no guarantee yet on lasting trade agreements”. Gourinchas noted that so far, the incidence of the tariffs seems to fall squarely on US importers, with import prices (excluding tariffs) mostly unchanged, and limited retail price increases. “But they may still pass costs onto US consumers, as some have started to do, and trade may reroute permanently, leading to global efficiency losses.”

Gourinchas continued that ‘incorrect’ refers to the fact that other economic forces besides trade policy are simultaneously at play. “In the US, tighter immigration policies are shrinking the foreign-born labour supply—another negative supply shock on top of that from tariffs. So far, this has been offset by cooling labour demand, keeping unemployment steady.  

“Financial conditions remain loose, the dollar has softened in the first half of the year, and AI-driven investment is booming.

These demand-side forces are supporting activity, while adding further to the price pressures from the negative supply shocks."

Therefore the full impact has yet to materialise, according to the IMF, and the effects could well increase over time as firms “gradually pass the tariffs on to customers as trade is rerouted more permanently and the global economy gradually becomes less efficient". Past experience, the report notes, "suggests that it may take a long time before the full picture emerges". 

The current resilience may merely be a temporary trade-off against future, more entrenched inefficiency, signalling a long-term decline in global economic dynamism driven by fragmentation and suboptimal resource allocation.

 

Regional pictures

Regional divergences further complicate the global economic outlook. China, identified by the IMF as the country "hardest hit by US tariffs”, has only a "modestly" projected decline in growth. This has been achieved through robust policy measures, specifically a sharp depreciation of the real effective exchange rate, coupled with a "front-loaded surge in exports toward Asian and European partners, and some fiscal expansion". Meanwhile, the Euro Area has seen a modest boost in 2025, largely due to fiscal expansion in Germany.

The World Economic Outlook also highlighted a significant bright spot in the global south: the continued resilience of Emerging Market and Developing Economies. These economies have benefited from "easier financial conditions, on the back of a depreciated dollar”, and have continued to show "significant resilience”, due in part to "strong and improving policy frameworks", said the IMF. 

Despite these regional offsets, the IMF’s overall assessment of the trade shock remains downbeat. “Dimming lacklustre growth prospects” have resulted in a projected global slowdown for the second half of the year, with only a partial recovery next year.

Compared with prior projections, the collective toll of the tariff disruption is a "cumulative global output loss of about 0.2% by the end of 2026". This ‘small’ percentage represents trillions of dollars of lost global income.

As the economy slows, risks to the IMF forecast are heavily "tilted to the downside". Among the most prominent long-term concerns is the current AI boom, which the report notes "presents some parallels with the dot-com boom of the late 1990s". The current "market optimism about a new technology", while supportive of investment, carries the inherent risk of a speculative bubble that could burst, adding financial instability to an already fragile trade and growth outlook.