IMF cuts global growth forecast for 2025 to 2.8% from 3.3%
The International Monetary Fund (IMF) announced in its updated World Economic Outlook report on Tuesday that it cut the global growth projections to 2.8% in 2025 and to 3% in 2026 from 3.3% for both years in the previous forecast, citing century-high US tariffs.
Key takeaways
"Swift escalation of trade tensions and high uncertainty expected to have significant impact on growth in all regions."
"Risks to global economy have increased and worsening trade tensions could further depress growth."
"Financial conditions could tighten as markets react to lower growth prospects, markets may face more severe tests."
"Global inflation expected to reach 4.3% in 2025 and 3.6% in 2026, with notable upward revisions for advanced economies."
"Intensifying downside risks dominate global outlook, escalating trade war could reduce near- and long-term growth."
"Policy shifts and deteriorating sentiment could trigger further repricing of assets, sharp adjustments in forex rates."
"Broader financial instability could occur, including damage to international monetary system."
"US growth projected to slow to 1.8% in 2025, down 0.9 percentage point from January forecast, due to policy uncertainty, trade tensions."
"IMF sees Mexico's economy among the hardest hit and forecasts it contracting by 0.3% in 2025, down from 1.4% growth forecast in January."
"US faces significant uptick of one percentage point in headline inflation, not all due to tariffs."
"Federal Reserve will have to be very vigilant on de-anchored inflation expectations, impact on wages."
"Independence is key component of central banks' credibility on fighting inflation."
"Not forecasting recession for US but risk of recession has increased to nearly 40%."
"Depreciation of US Dollar has been orderly, not seeing dislocation in currency markets."
"Restoring predictability to global trading system is absolutely critical to bolstering growth."
Market reaction
The US Dollar Index showed no immediate reaction to the IMF's report and was last seen gaining 0.3% on the day at 98.60.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
Author
Eren Sengezer
FXStreet
As an economist at heart, Eren Sengezer specializes in the assessment of the short-term and long-term impacts of macroeconomic data, central bank policies and political developments on financial assets.
