IMF: Trump tariffs are crashing world economy, with US worst off

U.S. President Donald Trump’s trade war will badly dent the global economy and has raised the risk of a financial crisis, the International Monetary Fund warned on Tuesday.

On the eve of its spring meeting, the IMF slashed its global growth forecast for 2025 to 2.8 percent from 3.3 percent at its last quarterly update in January. The trade war will also remain a drag on growth next year, it said while cutting its growth forecast to 3 percent from 3.3 percent.

“The global economic system under which most countries have operated for the last 80 years is being reset, ushering the world into a new era,” chief economist Pierre-Olivier Gourinchas wrote in a blog accompanying two new IMF reports on Tuesday. “Existing rules are challenged while new ones are yet to emerge.”

The IMF gave fresh ammunition to critics of Washington’s trade policy, who allege the U.S. will be the biggest loser in any trade war. It cut its forecast for the U.S. economy by nearly a full percentage point to 1.8 percent, from 2.7 percent in January. That’s a bigger hit than either China or Canada (both 0.6 percent) or the eurozone (0.2 percent) will suffer, according to the Fund’s economists. At the same time, it also raised its inflation forecast for the U.S. this year by a full percentage point to 3 percent.

Analysts argue the U.S. will be hurt more because tariffs are being raised for almost all imports, whereas they affect only certain sectors of the economies of America’s trading partners. The only large economy that saw a sharper downgrade than the U.S. was Mexico, where the IMF now foresees a 0.3 percent contraction in 2025 after previously forecasting growth of 1.4 percent.  

Gourinchas noted that the tariffs imposed by Trump have pushed America’s tariff rate, in real terms, above where it was during the Great Depression in the 1930s, while responses from its major trading partners have significantly elevated the global tariff rate. As a result, global trade, which has consistently bolstered growth rates and kept inflation down for the last 35 years, will grow this year at barely half the rate the Fund expected three months ago.

The IMF noted that gauges of consumer, business and investor sentiment have all started to flash red since the Trump administration launched its “Liberation Day” tariff package on April 2. “Sentiment was optimistic at the beginning of the year but has recently shifted to a notably more pessimistic stance as uncertainty has taken hold and new tariffs have been announced,” the Fund’s new World Economic Outlook read.  

Despite the downgrades, the U.S. is still expected to outperform the eurozone. The currency area is expected to grow by 0.8 percent in 2025 and 1.2 percent in 2026. The Fund now predicts another year of stagnation for Germany, Europe’s largest economy, with growth expected to pick up to 0.9 percent in 2026 under the big-spending policies of its new government. 

Risks of financial turmoil also rising

Beyond harm to individual economies, the IMF also warned that the new era of uncertainty also threatens to unleash turmoil in the world’s financial markets.

“Global financial stability risks have increased significantly” in the last two months, it said, as policy uncertainty has soared at a time when markets for both stocks and bonds were both trading at historically high price levels.  

That uncertainty raises the risk of sharp falls in prices, even though many markets have already undergone some hefty corrections, it said.

In addition, the Fund pointed out that this was happening after a big rise in borrowing among particularly risk-minded financial players such as hedge funds. U.S. bank lending to hedge funds is now greater than their entire equity capital, the financial buffer that banks hold to protect against unforeseen losses, the IMF said. High levels of borrowing usually amplify market moves in any direction.

Finally, the Fund warned that further turbulence could hit government bond markets, especially in countries where debt levels are high, e.g. emerging markets, where central banks are having to cut interest rates to support their economies. That is making their currencies less attractive and is causing international capital to flee in search of safer returns. China, Indonesia and several other countries have seen their currencies fall to multi-year lows in recent weeks.

U.S.-specific risks bubbling

While it didn’t single out the U.S., the IMF did flag one particular risk that is concentrated in the $29 trillion U.S. government debt market. That’s the so-called basis trade, where investors — usually hedge funds — borrow heavily to exploit small differences in prices between government bond prices and related financial instruments called futures contracts. 

The IMF offered a slew of policy recommendations to mitigate the emerging problems. It stressed that authorities must be prepared to intervene to stop markets from seizing up, and urged that they ensure financial institutions can access central bank backstops to provide help in case of crises.

A day after U.S. financial markets were shaken by a fresh barrage from Trump against Federal Reserve Chair Jerome Powell, the Fund also warned of the need for governments to allow central banks to do what is necessary to keep inflation down and prevent financial instability.

“We have seen time and time again that central bank independence is an important foundation for central banks to achieve their goals,” IMF financial counsellor Tobias Adrian told a press briefing.

However, he played down suggestions that the dollar, or the U.S. government bonds that the world’s central banks hold as their official foreign reserves, are somehow losing their status as a safe haven. He acknowledged there had been “some volatility,” but added “it’s really too early to tell” how long that will lasting.

“U.S. capital markets remain the largest and most liquid in the world,” Adrian said.

Geoffrey Smith contributed reporting.