The International Monetary Fund (IMF) will publish its latest global economic outlook on Tuesday. This year’s report will focus on how increased tariffs and trade barriers have increased unpredictability and instability in the world economy. Kristalina Georgieva, the Managing Director of the IMF, recently called on countries to reduce tariffs. She stressed the importance of relaxing trade barriers given that the global trading system is experiencing rapid transformation.
The resilience of the world economy is currently being tested by what Georgieva described as “the reboot of the global trading system.” This shift has the potential to upend capital markets as we know them. In fact, just recently we’ve lived through that volatility ourselves, particularly on Wall Street. Their forecast is for a very weak global economic growth of only 3.3% this year and next. This represents a modest uptick from the 3.2% rate projected for 2024. This prediction may soon be upended. The trade wars that started and amplified under the Trump administration have made markets even more uncertain and volatile worldwide.
Georgieva recognized that uncertainty is fueled by tariffs, saying that tariffs are “not just annoying but quite expensive for economies.” “This feeling of unfairness in some places feeds the narrative: we play by the rules while others game the system without penalty,” she added. This popular admiration for a fighter just tapped into the rising anger seething among countries caught in the crossfire of America’s trade wars.
Most notably, the United States’ trade relationship with China has soured, leading to a full-blown tit-for-tat tariff war. For each round of new tariffs that the U.S. administers towards Chinese imports, China retaliates with similar tariffs towards U.S. exports. This cycle exacerbates the climate of global economic uncertainty. Modern supply chains are deeply interrelated. When one country adds a tariff, it has a disproportionate effect on the price of one good across many countries.
Then global inflation shot up after the onset of COVID-19. Therefore, experts expect it to fall from 5.7% in 2024 to 4.2% this year and continue decreasing to 3.5% by 2026. According to Pierre-Olivier Gourinchas, the IMF’s chief economist, policies promised by Trump “are likely to push inflation higher in the near term.”
Financial markets have been particularly jittery on Wall Street. For traders, whipsaw action has become the rule, as prices surge one day and tank the next, sometimes even hour to hour. The impact of the recent escalation of tariffs and trade tensions should not be underestimated in creating this instability.
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