Six months ago, the International Monetary Fund (IMF) warned that the global economy was heading for a serious slowdown, in the face of Donald Trump’s tariffs.
He lowered his forecast for U.S. economic growth and predicted that global economic growth would slow to 2.8% this year.
Today, the Fund has resurfaced with a distinctly different message. This has spurred growth in the United States and elsewhere. This year, global economic growth will actually be 3.2%, the press release added. So, has the Fund conceded victory to Donald Trump? Are we no longer worried about the economic impact of prices?
Last money: Shock over retirement age
Anyway, the World Economic Outlook (WEO), the IMF’s biannual analysis of economic trends, is well worth a look. This document is perhaps the ultimate summary of what economists think about the state of the world. So it has a lot of information, both on the United States, on big trends like artificial intelligence, on smaller economies like the United Kingdom and much more. So here are four things you need to know about today’s WEOs.
The tariff impact is much less than expected… so far
The key element is the last two words. The Fund upgraded U.S. and global growth, saying: “The global economy has demonstrated resilience in the face of trade policy shocks,” but added: “The unexpected resilience of activity and the weak response of inflation reflect – apart from the fact that the tariff shock turned out to be weaker than initially announced – a series of factors that provide temporary relief, rather than underlying strength economic fundamentals. »
In short, the IMF continues to believe that the things that worried it six months ago – higher inflation, lower trade flows and weaker income growth – will still manifest themselves. He’s just now thinking that it might take longer than expected.
The UK faces the highest inflation in the industrialized world
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August: Tax hikes play equal role in rising inflation
One of the standard exercises whenever one of these reports is published is for the Treasury to pick a flattering statistic that it can then go home and talk about over the following months. This time around, they will likely focus on the fact that Britain is expected to have one of the strongest economic growth rates in the G7 (second behind the US) this year, and third next year.
But there are some less flattering prisms through which the British economy can be viewed. Firstly, if you look not at gross domestic product but (as you really should) at GDP per capita (which adjusts for the growing population), in fact UK growth next year is on track to be the lowest in the G7 (at just 0.5 per cent).
Second, and perhaps most worrying, the United Kingdom inflation remains stubbornly high compared to most other economies, the highest in the G7 this year and next. Why is Britain an exception? It’s a question that Chancellor Rachel Reeves and Bank of England Governor Andrew Bailey will have to explain when they visit Washington this week for the Fund’s annual meeting.
What happens if the artificial intelligence bubble bursts?
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Nvidia CEO hails UK’s place in global AI race
Few, even in the AI world, doubt that the extraordinary rise in technology stock prices in recent months has some of the traits of a financial bubble. But what happens if this bubble bursts? The Fund contains the following, somewhat frightening, passage:
“Overly optimistic growth expectations for AI could be revised in light of incoming early adopter data and could trigger a market correction. High valuations in technology and AI-related sectors have been fueled by expectations of transformative productivity gains. If these gains do not materialize, the resulting earnings disappointment could lead to a revaluation of the sustainability of AI-driven valuations and a fall in technology stock prices, with systemic implications.
“An eventual collapse of the AI boom could rival the dot-com crash of 2000 in severity, especially given the dominance of a few tech companies in stock indexes and the involvement of less regulated private loans financing much of the industry’s expansion. Such a correction could erode household wealth and dampen consumption.”
Pay attention to what is happening in less developed countries
For many years, one of the main topics of discussion at every IMF meeting has been the financial situation of many of the world’s poorest countries.
Rich countries have lined up in Washington with generous policies aimed at providing handouts and reducing debt for developing countries. But since the financial crisis, the rich world’s attention has turned inward – for understandable reasons. One of the consequences of this situation is that the amount of aid intended for poor countries has decreased from year to year. At the same time, the amount these countries have to pay in annual interest on their debt has gradually increased (as have global interest rates). The result is rather worrying. For the first time in a generation, poor countries’ debt interest payments now exceed their aid receipts.
I’m not sure what that means. But what we do know is that when poor countries in the Middle East and sub-Saharan Africa face financial problems, they often face instability. And when they face instability, it often impacts everyone. All of this is to say that this is something to watch with concern.
The IMF report is, strictly speaking, the kick-off to a week of meetings in Washington. So there will be more in the coming days, as finance ministers from around the world gather to discuss the state of the global economy.