Tariff war, IMF cuts global growth estimates below 3%. For the US, one point less

China, based on the baseline scenario, would lose 0.6 points of GDP, with 2025 growth stuck at 4%, down from 5% in 2024, when the economy was driven largely by foreign demand. The support measures under study by the regime could help absorb some of the blow from Trump's tariffs. Chinese inflation is also slowing (to 0.8%).

The correction for the Eurozone is more moderate: growth forecast for 2025 loses 0.2 % to 0.8 %. In 2026 there should be a moderate recovery to 1.2%, driven by real wage growth and a boost in German public spending, after the changes to the debt constraint passed in March, which should have a positive impact on France, Italy and Spain.

Italy sees its already low recovery expectations for 2025 (0.4%, with a downward correction of 0.3%) downgraded. Growth will also be below 1% in 2026 (0.8%). Public debt is seen rising from 135.3% of GDP in 2024 to 137.3% this year and to 138.5% in 2026. The deficit drops to 3.3% this year and below 3% in 2026.

Germany will continue to ride the edge of recession, with zero growth forecast in 2025 (-0.3% difference from January).

As is now customary, Spain is a story in itself: 2025 growth slows down from 3.2% in 2024, but stands at a robust 2.5%, which is even better than the January forecast (+0.2%). A rare case in this outlook.

In the reference scenario, the one taking into account only the measures announced until 4 April, the IMF expects the Federal Reserve and the European Central Bank to continue lowering rates, but at different rates. In the US, the rate is expected to fall to 4 per cent at the end of 2025 and reach the long-term equilibrium point at 2.9 per cent only at the end of 2028. In the Eurozone, rates are expected to fall to 2% by mid-year (from 2.25% decided on 17 April).

Strong upward revisions for US inflation, which the IMF expects to be 3% in 2025, one point higher than the January forecast. For the Eurozone, on the other hand, the forecast is unchanged: inflation is expected to be 2.1 % in 2025 and 1.9 % in 2026.

Tariffs, reiterate the IMF economists, are a negative shock for the country that imposes them, as resources are reallocated towards the production of uncompetitive goods, with a loss of aggregate productivity, lower activity and production costs, and higher prices. In the medium term, by reducing competition, tariffs increase the market power of domestic producers, reduce incentives for innovation and create rents.

For trading partners, tariffs are a negative external demand shock, driving away foreign customers, although some countries might benefit from the redirection of trade flows.

In the quest for maximum efficiency, global supply chains have reached a degree of complexity that multiplies the distorting effects of tariffs. Most traded goods are intermediate inputs that cross borders several times before being assembled into final products. The difficulties, the IMF report points out, "could propagate up and down the global input-output chain, with high multiplier effects, just as during the Covid pandemic," Gourinchas explains. On this basis, the Fund has revised its projection for global trade (goods and services) growth downwards to 1.7 per cent, a downward adjustment of 1.5 percentage points this year.

Uncertainty about trade policy is also an important factor. The initial reaction of many companies will be to pause and reduce investments and cut back on purchases. Banks will re-evaluate their offer of credit to businesses.

The effect of tariffs on exchange rates is not simple. The US could see its currency rise, as in previous episodes. This reflects the reduced demand for foreign currency as import demand falls, but also the likelihood that the affected countries may loosen their monetary policy. However, increased policy uncertainty, weaker growth prospects and an adjustment in global demand for dollar-denominated assets may weigh on the exchange rate, as seen immediately after the recent announcements. In the medium term, the dollar could depreciate in real terms if tariffs result in lower productivity in the US.

The IMF's baseline scenario takes into account the announcements on tariffs until 4 April. On 1 February, Trump's executive orders imposed tariffs on Canada, China and Mexico. An additional 10% tariff on all imports from China went into effect on 4 February, and a 10% tariff was imposed on 4 March.China responded with tariffs of 10-15% on imports of certain US agricultural products, energy commodities, and farm equipment, effective 1 February, and on other agricultural products, effective 10 March.US tariffs of 25% on all imports of non-energy goods from Canada (10% for energy) and 25% on all imports from Mexico went into effect on 4 March, with the exemption of goods that comply with the US-Mexico-Canada (Usmca) agreement.Canada announced counter tariffs of 25% on about 40% of imports from the US. The US also extended steel and aluminium tariffs, as of 12 March, removing all exemptions from the 25% tariff on steel and increasing the tariff on aluminium from 10 to 25%. On 26 March, the US announced a 25% tariff on all cars and parts. The measure is effective from 3 April for cars, while the one for components was postponed to 3 May.On 2 April, the US Fairness and Reciprocity Plan was introduced, which imposes a 10% minimum tariff on all countries other than Canada and Mexico, and duties of up to 50% for about 60 states. The universal 10% minimum tariff has been in effect since 5 April and the other tariffs are set to take effect on 9 April. Exemptions were enacted for key goods, such as pharmaceuticals, semiconductors, energy, and certain minerals.Canada's countermeasures, announced on 3 April, consist of 25% duties on fully assembled, non-U.S.-compliant vehicles imported from the United States. On 4 April, China announced tariffs of 34%, corresponding to the increased US duties on imports from China announced for 10 April.

In an alternative scenario, built on the situation before 2 April (i.e. with tariffs announced between 1 February and 12 March against Canada and Mexico, the first wave against China, retaliation by Canada and China, and tariffs on steel and aluminium). Global growth would have been 3.2% for both 2025 and 2026, basically in line with the January forecast.