The global economy has again proved stronger than expected, though not necessarily healthier, according to the latest World Economic Outlook published on Tuesday (14 October) by the International Monetary Fund (IMF).
It described a world showing “unexpected resilience” despite Trump-era trade tariffs, but warned risks remain as uncertainty clouds the outlook.
Tariffs are at their highest level in decades, averaging 19 percent. But global growth is holding at 3.2 percent this year and 3.1 percent next, roughly in line with pre-pandemic trends.
IMF chief economist Pierre-Olivier Gourinchas speaking at a press event on Tuesday said the pain so far has been blunted by rapid supply-chain redirection, limited retaliation and active government support.
The euro area, for example, has seen a modest boost from fiscal expansion in Germany, while emerging economies have benefited from easier financial conditions and a weaker dollar.
But this situation could soon change. “The global economy could take a turn for the worse if trade tensions worsen,” said Gonchinchas.
Uncertainty is already weighing on investment: “US tech is still attracting money, but overall investment is declining as businesses scale back plans.”
In the US, the IMF has revised growth down and inflation up, calling tariffs a “negative supply shock.” Tighter immigration rules are also squeezing the labour force. The fund estimates Trump’s curbs could shave 0.3–0.7 percentage points off GDP, while wage-inflation surges in labour-intensive sectors.
Asked if the US AI tech “bubble” keeping growth afloat was about to burst, Gourinchas said: “Nobody can know what will happen.”
Much of the IMF outlook dwells on the spread of industrial policies worldwide. While they can “improve economic outcomes,” the fund warns of misallocation and hidden fiscal costs, especially when subsidies and tax breaks are poorly targeted.
China, the main target of Trump tariffs, has offset much of the tariff shock through a sharp depreciation of the renminbi and a surge in exports to other Asian and European markets.
But according to Gourinchas, China’s growth engine is faltering. “We see rising export volumes matched by falling prices,” which he said was a “sign that global markets are struggling to absorb China’s output” and is fuelling trade frictions.
Economic problems are compounded by a real estate sector that continues to shrink four years after an unresolved property bust.
The country, Gourinchas warned, is “on the verge of a debt-deflation cycle,” a mix that could have destabilising global consequences.
“Our advice to the Chinese authorities has long been the same: rebalance growth towards sustainable domestic demand,” he also said. “Shifting away from heavy dependence on exports would make the economy more resilient in today’s fragile environment.”
Experts, however, doubt that will happen as Chinese leadership feels it has strong leverage over other countries because it dominates critical sectors such as batteries or rare earths.
“Nobody should be under any illusion that China is going to abandon this heavy, industry-focused model,” said Alexander Brown of the Mercator Institute for China Studies (MERICS) at a separate event organised by the Bruegel think tank in Brussels on Tuesday.
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Wester is a journalist from the Netherlands with a focus on the green economy. He joined EUobserver in September 2021. Previously he was editor-in-chief of Vice, Motherboard, a science-based website, and climate economy journalist for The Correspondent.
Wester is a journalist from the Netherlands with a focus on the green economy. He joined EUobserver in September 2021. Previously he was editor-in-chief of Vice, Motherboard, a science-based website, and climate economy journalist for The Correspondent.