The International Monetary Fund (IMF) has moderately upgraded its predictions for global economic growth in 2025 and 2026, largely due to unexpectedly robust consumer spending ahead of a tariff increase set for August 1 in the United States. This shift results in a decline of the effective tariff rate from 24.4% to 17.3%.
However, the IMF cautions that the world economy still faces significant challenges, including the risk of renewed tariff hikes, geopolitical strife, and escalating fiscal deficits, which could lead to increased interest rates and tighter financial conditions worldwide.
“The global economy remains under stress, and it will continue to face challenges with tariffs at the current levels, despite improvements,” remarked Pierre-Olivier Gourinchas, IMF’s chief economist.
In an updated version of its World Economic Outlook released on a Tuesday, the IMF raised its growth forecast for 2025 by 0.2 percentage points to 3% and for 2026 by 0.1 percentage points to 3.1%. These projections still fall short of the 3.3% growth previously estimated in January and the historical average of 3.7% before the pandemic.
The organization expects global headline inflation to dip to 4.2% in 2025 and 3.6% in 2026. Still, it notes inflation in the US might remain above target levels as affected by tariffs passed on to consumers in the latter half of the year.
Despite a decrease since April, the US effective tariff rate—measured as the proportion of import duty revenue to goods imports—remains significantly higher than the 2.5% recorded in early January. Meanwhile, the global tariff rate averages 3.5%, down from 4.1% in April, according to the IMF.
US trade policy, particularly under President Donald Trump, has dramatically altered the landscape, with a 10% tariff imposed on nearly all countries since April and threats of more significant duties on the horizon. A temporary halt on escalated tariffs between the US and China has been maintained until August 12, with ongoing negotiations in Stockholm potentially influencing future commitments.
Current US tariffs on automobiles, steel, and other metals range between 25% to 50%, with imminent increases anticipated on pharmaceuticals, lumber, and semiconductor chips.
The IMF stressed that upcoming tariff hikes were not included in its current projections, which could elevate effective rates even more, causing disruptions and amplifying the consequences of increased tariffs.
Shifting Tariffs
Gourinchas mentioned that the IMF is analyzing recently negotiated 15% tariff agreements between the US, the European Union, and Japan, which were not included in the July forecast. He noted that current rates are similar to the 17.3% figure central to the IMF’s estimates.
“At this moment, we do not observe a substantial alteration in the effective tariff rates imposed by the US on other nations,” he noted, emphasizing the need to monitor the durability of these agreements and any subsequent trade policy changes.
Simulations conducted by IMF staff indicated that global growth in 2025 would be about 0.2 percentage points lower if the maximum tariffs announced in April and July were implemented, underscoring ongoing uncertainties.
While the world economy has shown resilience to date, the IMF expressed that current economic activities suggest distortions arising from trade disruptions rather than genuine strength.
According to Gourinchas, the improved 2025 outlook has been primarily driven by businesses accelerating purchases to counter prospective tariffs, a temporary boost that is unlikely to endure. “This front-loading effect will diminish, leading to a potential slowdown in economic activity in the latter half of the year and into 2026,” he warned, highlighting the risks associated with this shift.
High tariffs are expected to persist, as US consumer prices show signs of an uptick. “The underlying tariff levels are significantly greater than they were earlier this year. If this trend continues, it will hinder growth and contribute to a subdued global economic performance,” he concluded.
Interestingly, a depreciation of the dollar—unlike previous trade conflicts—has been noted, which, while contributing to the tariff burden on other nations, is also helping to ease financial conditions.
The US is projected to see a growth rate of 1.9% in 2025, an increase of 0.1 percentage points from previous forecasts, with an uptick to 2% in 2026. Recent tax legislation is anticipated to increase the US fiscal deficit by 1.5 percentage points, partially offset by tariff revenues, as noted by the IMF.
The IMF also upgraded its projections for the eurozone by 0.2 percentage points, estimating 1% growth for 2025 and maintaining a 1.2% forecast for 2026. The revision is largely attributed to a significant rise in Irish pharmaceutical exports to the US; without this factor, the adjustment would have been considerably less marked.
China saw a more substantial forecast revision, with a 0.8 percentage point increase due to unexpectedly strong activity in the first half of 2025 and substantial reductions in US-China tariffs after a temporary truce. The IMF has now raised its forecast for Chinese economic growth in 2026 by 0.2 percentage points to 4.2%.
Emerging markets and developing economies are expected to witness growth rates of 4.1% in 2025, slightly declining to 4% in 2026, as reported by the IMF.
The IMF also revised its global trade forecast upward by 0.9 percentage points to 2.6% but reduced its 2026 outlook by 0.6 percentage points to 1.9%.