The International Monetary Fund (IMF) has just published its World Economic Outlook, and it does not take an expert to deduce that, even among some of the world’s top economic minds, confident predictions are currently hard to come by.
Every spring the IMF and World Bank hold their spring meetings in Washington, DC: a week of seminars, briefings and press conferences focusing on the global economy, international development and world financial markets. At both the spring meetings and the annual meeting, which are held each autumn, the IMF publishes its global economic growth forecasts.
For its 2025 spring meeting the IMF has published a baseline forecast, as well as an addendum analyzing the tariff events that took place between April 9 and 14. According to the fund’s report, world GDP will grow by 2.8% in 2025 and 3.0% in 2026. For the euro area, growth will be 0.8% and 1.2% for 2025 and 2026 respectively.
These forecasts represent a substantial downward revision from IMF figures published just three months ago. Globally, growth in 2025 is down by 0.5% compared with the fund’s January update, with a reduction of 0.2% for the euro area.
One major shift is key to understanding the most recent IMF report and its pessimistic predictions: We live in a much more uncertain world than we did three months ago.
Trump, tariffs and uncertainty
If one had to sum up the new US tariff policy in a word, “unpredictable” would suffice. The so-called “Liberation Day” of April 2, 2025, represented the largest tariff increase in modern history.
Just one week later, the US president then made two further announcements. First, a 90-day freeze on tariff hikes, apparently in search of bilateral agreements with the countries to which he had applied tariffs above 10%. Second, that China would be excluded from this exception, with tariffs on its products being raised to 145%.
This freeze means that until July EU goods being sold to the US will have a 10% tariff instead of the 20% that was announced on April 2. However, the 10% applied by the new US administration is still much higher than the average tariff of 1.34% that was in force before 5 April.
But what will the tariff be after these 90 days? What about in December? What about in two years’ time? What goods will be exempted? How far will the trade war between China and the US go? The answer to all of these questions is: Nobody knows. This uncertainty is evident in the IMF’s spring forecast.
Uncertainty is off the charts
The IMF’s world trade uncertainty index is currently seven times higher than it was in October 2024, much higher than in the pandemic.
As far as the economy is concerned, this uncertainty is far worse than a high but definitive tariff. With a tariff, companies can at least reorganize their production chain, and consumers can look for alternative products. There is a cost, but at least businesses and consumers can plan for it.
However, nobody can calculate these costs today because nobody knows how tariffs will evolve. An American company may decide today to buy a particular product from the EU thinking that the tariff will be 10%, but upon the product’s arrival in the US it turns out the tariff has risen to 100% because a presidential advisor said it would be good for the US economy to raise tariffs on that product.
Unbelievable though it may sound, this appears to be how the tariffs are being decided and enacted. According to one account, the US treasury and commerce secretaries were only able to persuade Trump to freeze recent tariff hikes because Peter Navarro – the president’s economic advisor and tariff ideologue – was in another room at the time.
The end result of this unpredictability is that the best course of action, for consumers and businesses alike, is inaction.
Fear and volatility
It is no surprise that these constant changes of plans are causing great instability in financial markets. Although Trump may have triumphantly celebrated rising stock prices immediately after the tariff freeze was announced, financial markets are now subject to levels of uncertainty and fear similar to those seen during Covid-19.
Five years ago, volatility was associated with increased demand for US government debt due to the “flight to safety” effect: investors selling higher risk investments and buying safer assets, such as gold and government bonds, in times of uncertainty.
Now we are seeing the exact opposite. The price of US bonds has fallen since “Liberation Day,” and this means that investors are selling them. In other words, markets no longer believe that US government debt is a safe asset. Given the role of the dollar and US debt in international markets, this paradigm shift may generate even more financial instability down the line.
Supply chains are breaking (again)
Covid-19, the last major global economic crisis, has one thing in common with the current situation: disruption of global supply chains. During the pandemic it was confinement that forced production to stop. Today, it is the imposition of tariffs.
However, there is another major difference. During Covid, people knew it was a matter of time before vaccines would become available and normality would return. Today, instability in financial markets comes not from any virus but from President Trump’s own advisors selling him all manner of plans to protect US economic interests.
Sergi Basco is profesor agregado de economia at the Universitat de Barcelona.
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