(NewsNation) — The International Monetary Fund is warning that President Donald Trump’s tariffs are a “negative shock” to economic growth.
Issuing a new economic forecast, the IMF said the global economic system that has been in place for the past 80 years is being reset, with U.S. tariff rates surging past levels from the Great Depression and prompting responses from trading partners.
The tariffs have left the stock market reeling and created widespread economic uncertainty as Trump has announced and paused tariffs over the past few months.
The IMF’s World Economic Outlook report has reduced the global growth forecast to 2.8% this year and 3% next year, a downgrade from January’s outlook.
Global growth remains above recession levels despite the slowdown, with global inflation revised up by 0.1 percentage point each year.
Within the global outlook, there is significant variation between countries. The U.S. growth forecast is reduced to 1.8% and the inflation forecast has been revised up by about one percentage point.
Meanwhile, China’s growth forecast has been lowered to 4% and inflation in the country has been revised down by about 0.8 percentage points.
Tariffs are the main reason for the downgrade and said that the 90-day pause on most tariffs does not change the outlook.
“The United States temporarily halted most tariffs while raising those on China to prohibitive levels. This pause, even if extended indefinitely, does not materially change the global outlook compared to the reference forecast,” the IMF said. “This is because the overall effective tariff rate of the United States and China remains elevated even if some initially highly tariffed countries will now benefit, while policy-induced uncertainty has not declined.”
The IMF also said global trade growth will dip more than output. Disruptions to the global supply chain, as a result of tariffs and economic uncertainty, are also expected to occur with companies likely taking steps to reduce investment and cut spending amid uncertainty.
Tariffs are also expected to influence the exchange rate.
“In the medium term, the dollar may depreciate in real terms if the tariffs translate into lower productivity in the US tradable goods sector, relative to its trading partners,” the IMF said.
If countries were to ease current trade policy stances and create new trade agreements, growth prospects could recover.
The IMF recommends policy changes, including the restoration of trade stability and negotiation of mutually beneficial arrangements along with agile monetary policy.
The report also pointed to technological progress and automation as the forces behind declines in domestic manufacturing not globalization, calling for a balance between the pace of progress and addressing the impacts on local economies.
“This requires that policymakers think well beyond the reductive lens of compensating transfers between ‘winners’ and’ losers,’ be it of technological revolutions or globalization. In this, unfortunately not enough has been done, pushing many to embrace a zero-sum worldview whereby the gains of some only come at the expense of others,” the agency said.