The International Monetary Fund (IMF) has sharply downgraded its global growth forecast, projecting the world economy to expand by just 2.8% in 2025, a significant drop from the 3.3% forecast made in January.

This update is contained in the published IMF’s April 2025 World Economic Outlook (WEO), which cites escalating trade tensions with the United States announcing a wave of new tariffs with trading partners responding with their own countermeasures, creating ripple effects across global supply chains and investor sentiment.

It also cites mounting policy uncertainty as the main culprits behind the slowdown.

“Since the release of the January 2025 WEO Update, a series of new tariff measures by the United States and countermeasures by its trading partners have been announced and implemented, ending up in near-universal US tariffs on April 2 and bringing effective tariff rates to levels not seen in a century.

“This on its own is a major negative shock to growth. The unpredictability with which these measures have been unfolding also has a negative impact on economic activity and the outlook and, at the same time, makes it more difficult than usual to make assumptions that would constitute a basis for an internally consistent and timely set of projections.

“Given the complexity and fluidity of the current moment, this report presents a “reference forecast” based on information available as of April 4, 2025 (including the April 2 tariffs and initial responses), in lieu of the usual baseline. This is complemented with a range of global growth forecasts, primarily under different trade policy assumptions.

“The swift escalation of trade tensions and extremely high levels of policy uncertainty are expected to have a significant impact on global economic activity. Under the reference forecast that incorporates information as of April 4, global growth is projected to drop to 2.8 percent in 2025 and 3 percent in 2026—down from 3.3 percent for both years in the January 2025 WEO Update, corresponding to a cumulative downgrade of 0.8 percentage point, and much below the historical (2000–19) average of 3.7 percent,” part of the report read.

In advanced economies, growth is now expected to slow to 1.4% in 2025, with the U.S. economy seeing a notable downgrade—now projected at 1.8%, nearly a full percentage point below previous estimates.
In emerging market and developing economies, growth is expected to slow down to 3.7 percent in 2025 and 3.9 percent in 2026, with significant downgrades for countries affected most by recent trade measures, such as China. Global headline inflation is expected to decline at a pace that is slightly slower than what was expected in January, reaching 4.3 percent in 2025 and 3.6 percent in 2026, with notable upward revisions for advanced economies and slight downward revisions for emerging market and developing economies in 2025.

The IMF flagged intensifying downside risks, warning that a deeper trade war, rising financial instability, and fragile policy buffers could worsen the economic landscape. Vulnerable emerging markets could face capital flight, currency pressures, and increasing debt burdens.

The Fund also noted that a reversal or de-escalation of current trade policies could offer a reprieve and potentially revive global growth.

“Intensifying downside risks dominate the outlook. Ratcheting up a trade war, along with even more elevated trade policy uncertainty, could further reduce near- and long-term growth, while eroded policy buffers weaken resilience to future shocks. Divergent and rapidly shifting policy stances or deteriorating sentiment could trigger additional repricing of assets beyond what took place after the announcement of sweeping US tariffs on April 2 and sharp adjustments in foreign exchange rates and capital flows, especially for economies already facing debt distress.

“Broader financial instability may ensue, including damage to the international monetary system. Demographic shifts and a shrinking foreign labor force may curb potential growth and threaten fiscal sustainability. The lingering effects of the recent cost-of-living crisis, coupled with depleted policy space and dim medium-term growth prospects, could reignite social unrest. The resilience shown by many large emerging market economies may be tested as servicing high debt levels becomes more challenging in unfavorable global financial conditions.

“More limited international development assistance may increase the pressure on low-income countries, pushing them deeper into debt or necessitating significant fiscal adjustments, with immediate consequences for growth and living standards. On the upside, a deescalation from current tariff rates and new agreements providing clarity and stability in trade policies could lift global growth,” it added.
The report calls for coordinated policy action, urging nations to work together to restore predictability in trade, strengthen debt sustainability, and address long-term structural challenges like demographic shifts and migration.

Source: Citi Newsroom