Anxious relief over the state of the global economy

Anxious relief, such was the mood in Washington DC last week during the Annual Meetings of the International Monetary Fund (IMF), from official and private sector participants alike. Relief that the global economy, and all its regional parts, are doing much better than expected in the Spring despite the US tariff shock. Anxiety that underneath the recent benign economy and markets, tectonic shifts are underway, still in their early stages and poorly understood.

Unexpected resilience

A rare area of consensus at the Meetings was that economic performance year-to-date had surpassed the gloomy expectations of the post “Liberation Day” Spring, and in the central scenario this should continue through 2026 as well. The reasons: resilient global trade, supportive financial conditions, reduced US policy uncertainty from the Summer onward and generally sound growth-supportive policies most everywhere else.

Not in the clear

Despite the relief, concerns abound. “Low growth, high debt, more frequent extreme weather events and natural disasters, trade tensions, and excessive global imbalances” were the common strains highlighted in the Chair’s Statement concluding the meeting of the International Monetary and Financial Committee, the group of finance ministers and central bank governors acting as a steering body for the IMF. Alongside these issues, each region was seen to have its own mix of pros and cons.

- In the US, AI-optimism and the massive investments it is spurring are—for now— trumping the adverse impact of tariffs, policy ad-hockery, and concerns around Fed independence (extensively discussed at the Meetings). The “K-shaped” vigour of consumption (driven entirely by higher-income households, while those at the other end of the income distribution are cutting back) and “low hiring, low firing” equilibrium of the labour market were noted as reasons for caution about the outlook, but on balance more leaned toward a reacceleration of the pace of growth and expected a significant further pickup in inflation, reflecting that the bulk of the tariffs passthrough is ahead of us.

- “Europe’s moment”, a ubiquitous catchphrase at the Spring Meetings, appeared to have passed. Europe this time was little discussed outside of meetings among Europeans. A lot of growth-positive structural reforms are in motion, growth is accelerating gradually, and inflation is at target, pleaded the Europeans. Too little, too slow actual change, was the general perception of the others.

- The IMF gave emerging markets overall top marks for quality of economic policies, and private sector participants exhibited strong interest and optimism about their prospects (after historic outperformance of EM assets year-to-date already). However, China—whose representatives kept an unusually low profile at the Meetings—was singled out for its persistent structural policy challenges leading to deflation, weak domestic demand, and growing contribution to global imbalances.

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