The IMF spells out the price of tariffs

The International Monetary Fund (IMF’s) spring forecast does not anticipate a world recession, estimating global growth of 2.8% in 2025, down from its January forecast of 3.3%.

There were some “notable markdowns” in country growth, led by its more pessimistic view of the US. Growth in the world’s largest economy is now forecast to 1.8%, compared with its prior expectation of 2.7%. The UK forecast was cut to 1.1% from 1.6% and China down to 4% from 5%. Germany, after a decline of 0.2% in gross domestic product (GDP) last year, is expected to stagnate this year with growth of 0.0%.

Source: IMF,World Economic Outlook, April 2025

The IMF has been upset by the high and erratic tariffs proposed by the US and by the gathering trade war with China. Its managing director has warned the US about rising Treasury yields. The IMF sees tariffs imposed by the Trump administration as inflationary for the US but thinks it could help curb price rises for many of the exporting countries, which will face lower demand for their goods.

This week sees a meeting of finance ministers and central bankers in Washington. Their agenda was meant to concentrate on the “debt and development crises in the global south”. They envisaged their normal discussions about how to help the emerging world, and how to encourage the transition to net zero. Instead, they have had to turn their attention to President Trump’s planned revolution in the world trading system.

They are discussing austerity policies to tackle large debt overhangs by many countries against the pressures of populist politics. New radical parties – and the Republicans – want protectionism and national priorities from government intervention and economic management.

What are the IMF’s options?

The IMF is worried about any undermining of the international rules-based system. This has been based on the notion that free trade is a good, that independent central banks are better at controlling inflation, that there needs to be large wealth and income transfers from the rich to the emerging world, that transition to net zero is crucial and governments need to rein in spending and increase taxes to control deficits. All of this are under attack from the new US administration.

President Trump likes tariffs and thinks some use of tariffs will be good to onshore investment to the US. He is critical of the independent Federal Reserve, telling it to get interest rates down. He Is reining in US contributions to overseas aid and military spending abroad. He regards net zero as a scam. He has some sympathy with the need to get debt down but wants lower taxes.

So, where does the IMF begin? It will be conscious that President Trump is willing to pull the US out of world bodies and has made the largest capital contribution of any country to the IMF. It would not, however, be easy for President Trump to disengage in this case.

The tried to avoid unduly provocative comments in its presentation of their findings but argued for greater stability and for avoidance of large swings and rises in tariffs. It wants central banks, where possible, to reduce interest rates, being conscious of the slowdown in the world economy.

The IMF and many countries represented at the gathering will be discussing how to respond to the US wish to rewrite the rules and will see if there is any way to tip the policy changes and negotiations more in the direction of ending up with tariff-reducing deals. It does expect an upturn again in in 2026 to 3% world growth, as it thinks some of the tariff hit is a one off.

What is the UK seeking to achieve?

In Washington, UK Chancellor Rachel Reeves should want to assist the effort to get a trade deal with the US over the line as one of the early ones to be agreed. There are reports of extensive discussions, particularly over digital taxes and online issues affecting US corporations, as well as asymmetric tariffs.

The UK government implies a limited deal focusing on a few sectors and issues rather than a full-scale, tariff-free trade agreement. There is press discussion of food, where the UK levies high tariffs and uses regulations to ban certain products such as chlorine-washed chicken.

The UK negotiation is complicated because the government seems keener on getting a so-called reset in its relationship with the European Union (EU). There will be an EU/UK summit on 19 May, when they will hope to announce an agreement on defence and a possible framework and timetable for a wider agreement.

The EU wants to secure access to plenty of UK fish after the end of transition next year. They want the UK to join a young people mobility scheme allowing more to come to the UK. They want the UK to adhere to more single market rules and do not wish to see EU food standards changed in ways which could help US exporters.

The UK seems to want the right for UK companies to bid for defence contracts when EU countries are buying weapons paid for out of the new EU borrowed fund to expand defence purchases and wants to remove some of the bureaucratic barriers to exporting food into the EU. Trade in food and goods generally generates a strong surplus for the EU, as it did when the UK was fully in the single market.

The Chancellor also wants to improve relations with China following her visit there, and sees opportunity in easier trade relations with an economy that already exports large amounts to the UK.

The problem is that the US will be less likely to offer a decent deal to the UK if the UK is seen to be siding with China, or if the UK insists on EU levels of protection for its market. It would be easiest if the UK negotiated a deal with the US first, then proceeded to the EU in the light of that deal.

Concussions

The tariff wars have upset markets and institutions like the IMF. Whilst its models do not attribute big changes to tariffs in the slowdown of the economies, there is a clear impact on sentiment and confidence. The IMF sees that, for many economies facing less demand for their exports to the US, there can be a mild pressure to lower inflation. Conversely, the US and countries retaliating with higher tariffs face an upwards impact on the price level.

The IMF rightly sees tariffs as imposing a supply-side shock to a country imposing them, removing a lot of potential supply from its market. It is a demand-side shock to an exporting country facing tariffs on its exports. It will likely lead to exporters short of US sales lowering prices to try to sell the goods elsewhere, hence the differential impact on prices.

As the IMF says, it will take some further central bank rate cuts to avoid a larger fall in GDP around the world, and to get a small recovery next year as the currently forecast. The projections are not as bad as the market fears on a bad day.