The International Monetary Fund has forecasted a modest deceleration in global economic expansion, with output growth easing to 3.2 percent in 2025 from 3.3 percent in 2024, followed by a further dip to 3.1 percent in 2026.
This projection reflects an upward revision from earlier estimates in April and July, attributed to milder-than-anticipated tariff impacts, agile supply chain adjustments, and robust private sector activity. Advanced economies will expand at around 1.5 percent annually, while emerging markets and developing economies maintain momentum just above 4 percent.
Tariff Shocks Prove Less Severe Than Feared
Initial fears of widespread trade disruptions following the imposition of broad reciprocal tariffs earlier in the year have eased, allowing for a more contained economic hit. Businesses front-loaded imports ahead of duties, rapidly rerouted supply chains, and benefited from negotiated exemptions and bilateral deals that limited effective tariff rates to levels below initial projections. Minimal retaliation from trading partners preserved much of the global trading system, supporting activity through the first half of 2025. These dynamics have offset some downward pressure, though the lingering effects continue to dim medium-term prospects.
AI Investments Provide Critical Lift to U.S. Performance
The United States stands out as a relative bright spot, with growth upgraded to 2.0 percent in 2025 and 2.1 percent in 2026. Surging investments in artificial intelligence infrastructure, alongside fiscal support from recent tax measures and easier financial conditions, have bolstered business spending and household resilience. This tech-driven surge has helped the U.S. economy absorb tariff-related headwinds better than peers, maintaining its role as a key offset to softer demand elsewhere. However, the rapid valuation gains in AI-related assets raise concerns about potential market corrections akin to past tech bubbles.
Divergent Regional Paths Underscore Uneven Recovery
Europe anticipates modest acceleration to 1.2 percent growth in 2025, buoyed by fiscal expansion in Germany and resilient intra-regional trade, though 2026 projections ease slightly to 1.1 percent amid ongoing policy flux. China holds steady at 4.8 percent for 2025 before moderating to 4.2 percent, propped up by exports but weighed down by property sector woes and unsustainable trade reliance. India leads emerging Asia at 6.6 percent, while Japan and South Korea lag at 1.1 percent and 0.9 percent due to demographic pressures. Latin America sees upgrades, with Mexico at 1.0 percent reflecting trade adjustments.
Downside Risks Dominate Amid Policy Uncertainty
Despite the tempered outlook, vulnerabilities abound. Escalating trade tensions, particularly a potential U.S.-China flare-up with higher duties, could shave 0.3 percentage points off global growth in 2026, with cumulative drags exceeding 0.6 points by 2028. Labor shortages from aging populations and immigration curbs, fiscal strains in vulnerable economies, and financial fragilities amplify threats. Inflation, while declining broadly to 4.2 percent in 2025 and 3.7 percent in 2026, persists above targets in the U.S. due to pass-through costs. Geopolitical strains and overextended markets further tilt risks downward.
Policy Imperatives for Navigating Flux
Restoring predictability through stable trade agreements and reduced uncertainty could unlock up to 1 percent in near-term global output when combined with AI productivity gains. Central banks must balance restrictive stances to anchor inflation against growth support, while governments prioritize credible fiscal consolidation and structural reforms to boost productivity. Emerging markets, showing greater policy resilience, offer lessons in adaptation but remain exposed to external shocks. The baseline remains steady yet fragile, demanding vigilant calibration to avert deeper slowdowns.