Theme of the Day: IMF upgrades global growth forecast as weaker USD aids world economy

The IMF has upgraded its global growth forecast amid signs that Donald Trump’s trade war will do less damage to the world economy than initially feared, with a weaker USD cushioning the impact of tariffs on US trading partners. The fund’s updated World Economic Outlook shows that global growth is expected to be 3% this year and 3.1% in 2026, up from previous projections published in Apr of 2.8% and 3%, respectively. This reflects front-loading ahead of tariffs, lower effective tariff rates, better financial conditions, and fiscal expansion in some major jurisdictions. The world’s two largest economies — the US and China — both also received upgrades. The more optimistic forecast from the IMF marks a shift from its previous World Economic Outlook in Apr, in which it warned that the trade war risked pushing the global economy into a “significant slowdown.” However, Jul’s forecast would still mark a slowdown from 2024’s global economic growth of 3.3%. The average growth rate before the pandemic was 3.7%.The IMF believes the US is now set to grow by 1.9% this year and 2% in 2026, compared with Apr’s estimates of 1.8% and 1.7%, respectively — forecasts which, at the time, many economists viewed as too bullish. While Trump’s “big, beautiful bill”, which was signed into law on 4 Jul, could help spur growth, the IMF indicated that the US president’s attacks on the Fed’s freedom to set interest rates could prove damaging. China’s economic outlook for this year is set to be 0.8 percentage points better than anticipated, with growth of 4.8% now expected by the fund.The IMF noted that companies “frontloading” imports ahead of the implementation of the new trade levies had boosted growth so far in 2025 but warned that this stockpiling created “exposures that could amplify the impact of any potential negative shocks”. Weakness in the USD had also helped to prop up the world economy. The currency has slumped almost 9% this year against a basket of currencies including the euro and the pound on concerns over the trade war as well as the Fed’s independence. Since many foreign companies and emerging market economies have debt denominated in the US currency, depreciation makes that debt cheaper to service. The net effect right now is that it’s providing a little bit of buoyancy to the global economy by easing global financial conditions.Risks to the global economy remain firmly to the downside. The current trade environment remains precarious. Tariffs could well reset at much higher levels once the ‘pause’ expires on 1 Aug or if existing deals unravel. If this were the case, model-based simulations suggest global output would be 0.3% lower in 2026. Without comprehensive agreements, the ongoing trade uncertainty could increasingly weigh on investment and activity. Further, while exports front-loading has supported global activity so far, firms could become vulnerable if the demand for stockpiled goods does not materialize. The geopolitical environment also remains fragile, with a potential for more negative supply disruptions.