As the global economy continues to weather rocky terrain, recent signals show that uncertainty for international trade is on the rise. Tariff pass-through is speeding up, making a growing impact on U.S. household budgets. This new trend makes monetary policy in large economies even harder to manage. Meanwhile, President Trump has warned that he will slap a 100 percent tariff on Chinese imports. At the same time, Beijing has slapped export restrictions on critical minerals, priming the pump for a cutthroat economic landscape.
The IMF expects global growth to be a tin notch higher than its last forecast. At the same time, it cautions that resilience will wear off, resulting in more modest growth in the second half of the year. Despite a surprisingly strong beginning to the global economy in 2023, recent turmoil has cast doubt on that strength’s sustainability.
Tariffs and Consumer Prices
Tariffs much more easily can be passed on to U.S. consumers. This puts additional strain on increasingly tight household budgets. Consumers are still struggling with rising prices due to the Administration’s trade policies. This loss of spending power will drive lower consumption and could even increase the risk of economic stagnation.
The already challenging realities of tariff implementation have only gotten worse with the larger economic backdrop. The IMF Chief Economist Pierre-Olivier Gourinchas noted,
“The flare-up last week is an example of how these tensions can resurface very quickly and affect the outlook.”
Yet, such statements illuminate the complex web of connections between trade policy and domestic economic stability. Whether it’s groceries or electronics, as tariffs increase, companies will be compelled to change their pricing strategies, directly affecting all consumers.
Moreover, these developments in pricing dynamics may result in strong shifts in monetary policy. Central banks today face the dilemma of fighting inflation. They need to accomplish this while avoiding harming growth. This is a balancing act made more difficult by rising trade frictions.
Global Economic Growth Projections
The IMF recently predicted that global output will grow by only 2.6 percent by 2025. That is a full percentage point less than the 3.6 percent growth rate projected for 2024. The negative revision downward is based on the risks associated with continuing geopolitical tensions and their possible effects on underlying economic strength.
In spite of all those obstacles, other places are still able to show, against the odds, resilience. Today, most advanced economies enjoy robust labor markets. At the same time, Asia Pacific—particularly East Asia—maintains streaks of double-digit momentum, counterbalancing an overall weak long-term trajectory of global expansion. While ubiquitous on the surface, this growth is not evenly spread across sectors and states, prompting concerns about future sustainability and resiliency.
The IMF further forecasts global growth will decline from 3.3 percent in 2024 to 3.2 percent in 2025. By 2026, they project it to fall even more down to 3.1 percent. While encouraging, this trend to shift investment needs highlights the importance of having policymakers keep their eyes on the ball both at home and abroad.
Market Reactions and Future Outlook
In reaction to the latest outbreak of trade-war rhetoric, global equities dipped sharply and then partially retraced that drop. These changes are a barometer for investor sentiment as uncertainties over trade wars and their potential impacts on the economic order continue to rise.
As countries navigate the realities introduced by tariffs and other trade barriers, the future of the global economy hangs in the balance. Policymakers need to carefully manage their way through this environment of increasing risk while continuing to promote growth and prosperity.
Beijing’s own July 2023 export restrictions on critical minerals further complicate this narrative. As businesses face these new pressures, the interconnectedness and fragility of global supply chains become readily apparent. These restrictions can lead to supply shortages for our nation’s industries that rely on these materials. In doing so, costs will increase in turn, adding to existing inflationary pressures.