Newsflash: the International Monetary Fund has slashed its forecasts for global growth this year and in 2026, due to the disruption caused by Donald Trump’s trade war.The IMF is now predicting that growth across the world economy will fall to 2.8% this year, down from 3.3% in 2024, followed by 3% growth next year.Back in January, the Fund had forecast 3.

3% growth in both 2025 and 2026.It blames the direct effects of the new trade measures and their indirect effects through trade linkage spillovers, plus heightened uncertainty, and deteriorating sentiment.In its latest World Economic Outlook, the Fund says:“The swift escalation of trade tensions and extremely high levels of policy uncertainty are expected to have a significant impact on global economic activity.”Growth in advanced economies is now projected to be 1.4% in 2025, half a percentage point lower than it forecast in January.

The report also shows how Donald Trump has pushed up the US effective tariff rate to the highest in over 100 years – above the levels which compounded the Great Depression:The IMF warns, soberly, that the outlook is dominated by “intensifying downside risks”,Its World Economic Outlook says:Ratcheting up a trade war, along with even more elevated trade policy uncertainty, could further reduce near- and long-term growth, while eroded policy buffers weaken resilience to future shocks,Divergent and rapidly shifting policy stances or deteriorating sentiment could trigger additional repricing of assets beyond what took place after the announcement of sweeping US tariffs on April 2 and sharp adjustments in foreign exchange rates and capital flows, especially for economies already facing debt distress,Broader financial instability may ensue, including damage to the international monetary system,Time to recap…The International Monetary Fund has warned that Donald Trump’s tariffs have unleashed a “major negative shock” into the world economy, and cut its forecasts for US, UK and global growth.

The Washington-based lender has cut its forecast for global GDP growth to 2.8% for this year – 0.5% weaker than it was expecting as recently as January.Its forecasts show every major economy being hit, with the UK expected to grow by 1.1% this year, down from 1.

6% predicted in January.The IMF expects a sharper deterioration for the US, from 2.7% to 1.8%.In its latest World Economic Outlook, the IMF says:“We expect that the sharp increase on 2 April in both tariffs and uncertainty will lead to a significant slowdown in global growth in the near term.

”At a press conference in Washington DC, the IMF also explained that the UK’s downgrade was due to domestic factors – including weak growth at the end of 2024 – more than due to Trump’s trade war.The Fund has also raised the chances of a US recession in the next year to almost 40%.The IMF is also concerned that the global financial system is coming under increasing strain as Donald Trump’s trade war rocks markets.“Global financial stability risks have increased significantly,” the IMF said in its regular snapshot of the system, urging regulators to be on the alert for potential crises.It pointed to the “sharp repricing of risk assets”, that has followed the US president’s tariff announcements since February – in particular his 2 April “liberation day” statement – and warned that there may be more to come.

The Fund’s latest forecasts were released hours after the US dollar fell to a three-year low against a basket of currencies, hit by anxiety after president Trump renewed his attacks on Fed chair Jerome Powell,Amid nervous early trading, gold hit a new record high of $3,500 per ounce,But Wall Street has shaken off some of yesterday’s losses, with the S&P 500 index now up 2,2%, as markets rise in Europe,Back in London, the stock market has ended the day at its highest closing levels since 3 April.

The FTSE 100 share index has closed 53 points higher at 8,328 points, up 0,65% today,European markets also had a positive day, with Germany’s DAX up 0,3% and France’s CAC gaining 0,5%.

UK chancellor Rachel Reeves has found a silver lining in the IMF’s downgraded growth forecasts, saying: “This forecast shows that the UK is still the fastest growing European G7 country.The IMF have recognised that this government is delivering reform which will drive up long-term growth in the UK, through our Plan for Change.“The report also clearly shows that the world has changed, which is why I will be in Washington this week defending British interests and making the case for free and fair trade.”The Fund’s new forecasts show that the UK is expected to be the third-fastest growing G7 member, with 1.1% growth, behind the US with 1.

8% and Canada with 1.4%.That would put the UK ahead of Japan and France, where 0.6% growth is expected, as well as Italy (0.4%) and Germany (where stagnation is forecast).

We also have fresh confirmation that Donald Trump’s trade wars have hurt European consumer confidence.The latest gauge of consumer sentiment across the EU has dropped this month, to -16.7 in April from -14.5 in MarchING say this “bad” reading jeopardising hopes for a consumption-led recovery in 2025.Peter Vanden Houte, ING’s eurozone economists, explains:While there is not a one-on-one correlation between consumer confidence and household consumption (with the former being more volatile), this doesn’t bode well for consumption growth.

Isn’t the economy all about animal spirits, after all?The IMF is urging countries across the world to “work constructively” together.They should “promote a stable and predictable trade environment, facilitate debt restructuring, and address shared challenges”, it argues.Tim Jones, Policy Director at Debt Justice, said there is an “urgent” need to cut the debts of the poorest countries in the world.“Around half of lower-income countries are making debt payments at a level that seriously constrains public spending.The biggest problem is high-interest loans owed to banks, hedge funds and oil traders.

We urgently need debt cancellation to reduce debts to a sustainable level, so that countries can afford essential spending on healthcare, education and responding to the climate emergency.”You wait ages for an important IMF report, and then two come along within an hour or so.The Fund has just issued its latest Global Financial Stability Report, which warns that global financial stability risks have increased significantly since last autumn.The report blames heightened economic uncertainty around trade policy, and tighter global financial conditions, which together are driving up financial risks worldwide.The Fund warns that there is a small risk of a severs slump in growth, saying":According to the IMF’s Growth-at-Risk (GaR) model, in the year ahead and with a 5 percent chance, global growth could fall below 0.

4 percent, highlighting an elevated level of financial stability risk,This figure is nearly a full percentage point worse than the October 2024 assessment,The Fund also flags three vulnerabilities that could weigh on financial stability going forward,Despite the recent turmoil in markets, valuations remain high in some key equity and corporate bond segments,Some financial institutions could come under strain in volatile markets, especially highly leveraged ones – such as hedge funds.

If they are forced to leverage it could exacerbate market turmoil.Further turbulence could descend upon sovereign bond markets, especially in jurisdictions where government debt levels are high.Q: How destabilising are Donald Trump’s attacks on the US Federal Reserve?IMF chief economist Pierre-Olivier Gourinchas replies that “central banks are facing a delicatae moment”, before emphasising the importance of central bank independence.He tells journalists at the Fund’s press conference that in many countries, tariffs will increase recessionary forces and lower price pressures, making it easier for central bankers to cut interst rates.But in the US, tariffs will increase price pressures.

That’s why the Fund expects US inflation will remain at 3% this year, as in 2024.Gourinchas then reminds us that we recently suffered a period of very elevated inflation.It is “critical” to ensure that inflation expectations remain anchored, and for people to believe that central banks will use their instruments to bring inflation back to target, he says.And one “critical aspect” of what central banks do comes from their credibility, Gourinchas insists, explaining:Central banks need to remain credible, and part of that credibility is build upon their central bank independence.From that perspective it’s very important to preserve that.

Over in New York, the stock market has opened higher, recovering some of yesterday’s sell-off.The Dow Jones Industrial Average, which tracks 30 large US companies, has gained 1.5% in early trading, up 577 points at 38,747 points.The broader S&P 500 is also 1.5% higher, up 77 points to 5,236 points.

The IMF are then challenged about why their forecast for China’s growth this year is weaker than recent official statistics,[the Fund has cut its forecast for China’s GDP growth this year to 4%, down 0,6 percentage points],IMF chief economist Pierre-Olivier Gourinchas explains that the forecast does not include the latest Chinese GDP data, which showed 5,4% annualised growth in Q1.

The downgrade reflects the fact that China is facing the “most elevated” tariffs from the US, Gourinchas says,On their own, tariffs would knock 1,3 percentage points off China’s growth rate this year,But this is counter-balanced by other factors, including fiscal stimulus from Beijing to support its economy,The IMF then takes a flurry of questions about the UK economy, and today’s downgrade of the UK’s growth forecast (to 1.

1% this year, down from the 1.6% previously expected).Q: What is weighing more on the UK economy – tariff barriers, or domestic challenges such as cost of living pressures?Pierre-Olivier Gourinchas says tariffs, and uncertainty, are weighing on the UK economy, as they are for many countries.But there are some UK-specific factors too, which are are probably the biggest reason for the 0.5 percentage point cut to this year’s growth forecast.

Gourinchas cites weaker growth at the end of last year, and some tightening of financial conditions as longer-term interest rates have risen.Q: Why do you predict the UK will have the highest inflation rate among the G7, and will tariffs be inflationary or disinflationary?Gourinchas points to “domestic factors”, including changes to regulated energy prices.Tariffs will be a “negative demand shock” for the UK economy, he predicts – it will weaken activity, and also lower price pressures.Q: Will high inflation make it harder for the Bank of England to cut interest rates?The Fund is expecting the Bank of England to cut interest rates four times during 2025, Gourinchas says – that implies three more cuts, as well as the cut in February.Q: Is it possible that Donald Trump is a genius, and knows something you don’t?Gourinchas doesn’t give an opinion on Trump’s mental prowess.

But… he insists that in the medium and long term, the IMF believes tariffs will have a negative impact for all regions.Q: What does the IMF think will happen to trade flows this year?IMF chief economist Pierre-Olivier Gourinchas says the Fund sees a “large impact on global trade coming from the tariffs”.Q: To what extent will the downward pressure on the US dollar help emerging markets who have dollar-denominated debt?The IMF’s Pierre-Olivier Gourinchas says there has been a “fairly broad-based” weakening in the US dollar in the last few weeks [reminder, it hit a three-year low this morning].Some of that is coming from the weaker US growth prospects, and some is coming from increased uncertainty.He says:It’s leading to a reassessment of the global demand for dollar assets.

Gourinchas points out that there has been “tremendous capital inflows” into the US markets in recent years.Markets are handling the current adjustment, he adds, and the Fund does not see signs of stress in currency markets.But what does it mean for emerging markets?Gourinchas agrees that a stronger dollar has put pressure on developing markets in the past, so that’s not a threat at the moment.But the flipside is that developing markets’ exports are losing some competitiveness because their currencies are rising against the dollar.Here are the IMF’s new forecasts for this year:IMF Growth Projections: 2025 🇺🇸US: 1.

8%🇩🇪 Germany: 0.0%🇫🇷France: 0.6%🇮🇹Italy: 0.4%🇪🇸Spain: 2.5%🇬🇧UK: 1