IMF lifts US outlook, warns countries against protectionism, subsidies

By Andrea Shalal

WASHINGTON (Reuters) – The International Monetary Fund on Friday raised its forecast for global growth in 2025 by one-tenth of a percentage point, with stronger-than-expected growth in the U.S. offsetting downward revisions in Germany, France and other major economies.

In its latest World Economic Outlook, the IMF projected global growth of 3.3% in both 2025 and 2026, and said global headline inflation was set to drop to 4.2% in 2025 and 3.5% in 2026, allowing a further normalization of monetary policy and ending the global disruptions of recent years.

But it said global growth remained below the historical average of 3.7% from 2000-2019, and warned countries against unilateral measures such as tariffs, non-tariff barriers or subsidies that could hurt trading partners and spur retaliation.

Such policies “rarely improve domestic prospects durably” and may leave “every country worse off,” IMF chief economist Pierre-Olivier Gourinchas said in a blog released Friday.

The new IMF forecast comes days before the inauguration of U.S. President-elect Donald Trump, who has proposed a 10% tariff on global imports, a 25% punitive duty on imports from Canada and Mexico until they clamp down on drugs and migrants crossing borders into the U.S., and a 60% tariff on Chinese goods.

“An intensification of protectionist policies, for instance in the form of a new wave of tariffs, could exacerbate trade tensions, lower investment, reduce market efficiency, distort trade flows and again disrupt supply chains,” the IMF said, noting growth could suffer both in the near and medium term.

Gourinchas told Reuters there was clearly “tremendous uncertainty” about future U.S. policies that was already affecting global markets, but the global lender needed to wait for specifics to draw clearer conclusions.

Rising confidence and positive sentiment in the U.S. could boost demand and spur near-term growth, but excessive deregulation especially in the financial sector could “generate boom-bust dynamics for the United States in the longer term, with repercussions for the rest of the world,” the IMF wrote.

DIGITAL CURRENCY OVERSIGHT

Gourinchas said the IMF would be looking carefully at any moves by the incoming U.S. administration to deregulate digital currencies, noting the need to ensure adequate oversight of cross-border payments to avert future “runs” on the system.

“The payment system is the blood that irrigates the economy, and if there is the emergence of alternative forms of payments, and these become important in the economy, you also have the potential for collapses or runs,” he said.

“This is a very fluid environment, but there is a need to be careful if there is a concentration of risks, if a few actors become critical for the payment system,” he said.

Tariffs could make it harder for businesses to get needed inputs, leading to higher prices, and immigration restrictions – also promised by the incoming Trump administration – could lead to labor constraints, which could also raise costs, he said.

Higher inflation would prevent the Federal Reserve from cutting interest rates as initially planned, he told reporters, adding that new U.S. policies would also likely strengthen the U.S. dollar and tighten financial conditions elsewhere.

Looser U.S. monetary policy, driven by tax cuts and other expansionary measures, could boost economic activity in the near term, but could require bigger fiscal adjustments later on that could then weaken the role of U.S. Treasuries as a global safe asset and lead to fiscal vulnerabilities, the IMF said.

“The increase in U.S. long-term yields, despite the Federal Reserve easing, reflects some market nervousness about future policies,” Gourinchas told a news conference.

DIVERGENT TRENDS

The IMF said it raised its growth forecast for the United States to 2.7% based on robust labor markets and accelerating investment, an increase of half a percentage point from its October forecast, with growth to taper to 2.1% next year.

It cut its euro area forecast by 0.2 percentage points to 1.0% for 2025, and by 0.1 percentage point to 1.4% for 2026, citing weaker-than-expected momentum in manufacturing and heightened political and policy uncertainty.

Gourinchas said the divergence between the United States and Europe was due to structural factors, reflecting stronger U.S. productivity growth particularly in the technology sector. It would linger, unless issues such as the business environment and deeper capital markets were addressed.

The IMF nudged its China growth forecast up by 0.1 percentage point to 4.6%, and by 0.4 percentage point to 4.5% for 2026, citing a fiscal stimulus package unveiled in November.

Gourinchas said China notified the IMF late on Thursday that its economy grew by 5% in 2024, a “positive surprise” compared to the IMF’s forecast of 4.8%. But he said Beijing said still needed to make domestic demand a bigger engine of its growth and stop relying solely on external demand.

The IMF cut the forecast for the Middle East and Central Asia region by 0.3 percentage point to 3.6% in 2025 and by the same amount to 3.9% for 2026, largely due to a downward revision for Saudi Arabia given recent voluntary oil production cuts.

DISINFLATION CONTINUING

The IMF said progress on lowering inflation was expected to continue, helped by the gradual cooling of labor markets and an expected decline in energy prices.

But new inflationary pressures fueled by increased trade tensions could arise that could result in higher-for-longer interest rates and strengthen the dollar.

In a blog accompanying the outlook, Gourinchas said central bankers had successfully reassured consumers they would keep a grip on inflation during the last surge, but expectations could become de-anchored if price pressures emerged again so soon after the recent surge. That meant monetary policy would need to be more “agile and proactive,” he said.

“The danger is that some of that … credibility capital may have been eroded,” he said, noting that households could be “very cautious and very reactive” if prices started rising again.