The International Monetary Fund (IMF) has reduced its global growth forecast for next year, warning of increasing risks stemming from geopolitical conflicts and rising protectionism. The IMF now projects the world economy to expand by 3.2% in 2025, which is 0.1 percentage points lower than its earlier estimate in July. This comes as the global economy faces mounting uncertainties, despite central banks’ success in controlling inflation without triggering recessions.
The IMF’s updated World Economic Outlook report, released on Tuesday, highlights that while inflation is expected to ease next year, falling to 4.3% from 5.8% in 2024, other risks are intensifying. According to Pierre-Olivier Gourinchas, the IMF’s Chief Economist, downside risks are growing, particularly due to geopolitical tensions, trade disruptions, and protectionist policies.
Rising Geopolitical and Economic Risks
“There is increasing uncertainty in the global economy,” Gourinchas said during a briefing. He specifically pointed to regional conflicts, such as wars, which could impact global commodity markets and disrupt global supply chains. Protectionist measures—such as tariffs and trade restrictions—pose another significant risk, with the potential to reduce global economic activity.
While the IMF report does not explicitly address the upcoming U.S. presidential election, it acknowledges that political developments in major economies could have far-reaching effects on global trade and economic performance. A recent Bloomberg analysis highlighted that policies like Donald Trump’s proposed 60% tariffs on Chinese imports and 10% duties on other nations’ goods would likely increase inflation, pushing the Federal Reserve to raise interest rates further.
In fact, the IMF noted that continued uncertainty in trade relations could lower global economic output by 0.5% by 2026.
Debt Concerns and Sectoral Weaknesses
Another pressing issue flagged by the IMF is the growing global public debt, projected to hit $100 trillion, or 93% of global GDP, by the end of this year. This surge is primarily driven by rising debt levels in major economies like the U.S. and China. The IMF has called on governments to take decisive steps to stabilize debt, though it acknowledges the political difficulties of cutting spending, especially given the need to invest in clean energy, support aging populations, and enhance security.
Regionally, the IMF downgraded its growth outlook for the eurozone, projecting the economy to expand by only 1.2% next year—0.3 percentage points lower than its previous forecast. This reduction is largely due to continued weaknesses in the manufacturing sectors of key economies like Germany and Italy.
In contrast, the U.S. received an upgraded forecast, with the IMF now expecting growth of 2.8% for 2024 and 2.2% for 2025, driven by stronger-than-anticipated consumer spending.
China Faces Challenges
China, the world’s second-largest economy, also saw its 2024 growth forecast reduced from 5% to 4.8%, largely due to troubles in its real estate sector and low consumer confidence. While the IMF acknowledged that recent policy measures by China’s central bank are steps in the right direction, Gourinchas noted that they are not yet sufficient to materially boost growth. Additional actions by China’s Ministry of Finance, announced after the IMF’s initial projections, have yet to be factored into the forecast.
Navigating Uncertain Times
Despite these challenges, the IMF praised central banks for their success in bringing down inflation without triggering widespread recessions, a feat Gourinchas described as a “major accomplishment.” However, he cautioned that global economies are not out of the woods yet, as monetary tightening could still weigh more heavily on growth than expected.
Other risks highlighted by the IMF include sovereign debt pressures in emerging markets, and potential spikes in food and energy prices due to climate shocks, geopolitical tensions, or renewed conflicts.
As the IMF continues to monitor these evolving risks, it underscores the need for governments and policymakers worldwide to focus on reforms that address trade uncertainties, stabilize debt, and ensure sustainable economic growth in the years ahead.
