The International Monetary Fund has warned that US economic policies under incoming president Donald Trump could hit the rest of the world and ultimately backfire on the US.
The IMF says a threatened wave of tariffs could make trade tensions worse, lower investment, hit market pricing, distort trade flows and disrupt supply chains.
Although tariffs, tax cuts and deregulation could boost the US economy in the short term, it could set the scene for an inflationary boom followed by a bust, it said.
This could weaken US Treasury bonds as a safe bet, it added.
The IMF predicted “stable, albeit lacklustre” global growth of 3.3% in both 2025 and 2026, below a historical average of 3.7%.
Its 2025 forecast was largely unchanged from a previous one, mainly because it expects higher US growth than previously predicted to offset lower growth in other major economies.
In the UK, the IMF predicted economic output would grow by 1.6% in 2025, edging up from the 1.5% it predicted in October last year.
Nevertheless, the latest IMF figures suggested the UK economy had weaker growth last year than the organisation had forecast.
Chancellor Rachel Reeves said the UK was “forecast to be the fastest growing major European economy over the next two years and the only G7 economy, apart from the US, to have its growth forecast upgraded for this year”.
The imminent arrival of Donald Trump in the White House dominates the section on risks in the IMF’s twice yearly forecast for the world economy.
When he was last in power, Trump launched into a trade war with China, and US policy led to tit-for-tat tariffs with the EU.
This time around, Trump has threatened tariffs on countries including China, Mexico and Canada, and has said he would impose 100% tariffs on the BRICS bloc of nine nations if they were to create a rival currency to the US dollar.
Trump has proposed a 10% tariff on global imports, a 25% duty on imports from Canada and Mexico, and a 60% tariff on Chinese goods.
While the IMF estimates these measures, along with tax cuts and deregulation, could boost the US economy in the short-term, there are some unusually grave warnings about it could hit the rest of the world and ultimately the US.
It warns that an inflationary US boom could be followed by a possible bust that would potentially “weaken the role of US Treasuries as the global safe asset”.
Investors see US Treasury securities as one of the safest possible bets, because the bonds – which are kind of like an IOU – are backed by the US government.
In addition, if red tape on business is cut too much, this could lead to a runaway dollar that could suck money out of emerging economies, depressing global growth.
Trump going ahead with deportations of illegal immigrants could “permanently reduce potential output” and also raise inflation.
IMF chief economist Pierre-Olivier Gourinchas said “tremendous uncertainty” about Trump’s future policies was already affecting stock markets around the world.
On Thursday, the World Bank also warned that US tariffs could hit trade and depress global growth this year.
The bank predicts global growth of 2.7% in 2025, which would be the weakest performance since 2019, aside from the sharp contraction seen at the height of the Covid pandemic.
Source: BBC
