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An abrupt increase in tariffs and a "surge in policy uncertainty" will slow global growth significantly if sustained, according to the International Monetary Fund (IMF) which forecasts global trade growth will be more than cut in half from 3.8 per cent last year to 1.7 per cent in 2025.
The IMF has also downgraded its economic growth forecasts by 0.8 percentage points since January to 2.8 per cent, with around half of that change resulting from tariff announcements.
"We are entering a new era as the global economic system that has operated for the last 80 years is being reset," IMF research department director Pierre-Olivier Gourinchas told a press briefing overnight.
"Since late January, many tariff announcements have been made, culminating on April 2, with near universal levies from the United States and counterresponses from some trading partners. The US effective tariff rate has surged past levels reached more than 100 years ago, while tariff rates on the US have also increased.
"Under an alternative path that excludes the April tariff announcements, global growth would have seen only a modest downgrade to 3.2 per cent this year."
The fund expects Australia's gross domestic product (GDP) to grow by 1.63 per cent this year, representing a decline of almost half a percentage point on forecasts made in October.
Gourinchas said that for the USA's trading partners - like Australia - tariffs would act mostly as a negative external demand shock, weakening activity and prices even if some countries could benefit from trade diversion.
"All countries are negatively affected by the surge in trade policy uncertainty, as businesses cut purchases and investment, while financial institutions reassess their borrowers' exposure," Gourinchas said.
"Uncertainty also increases because of the complex sectoral disruptions that tariffs could cause up and down supply chains, as we saw during the pandemic.
"The tariffs could appreciate the US dollar, as in previous episodes. However, greater policy uncertainty, lower US growth prospects, and an adjustment in the global demand for dollar assets are weighing down on the dollar."
The IMF has cut its forecasts for 2025 US GDP growth by 0.9 percentage points since January to 1.8 per cent, with the causes split between tariffs and weakening momentum.
"This was an economy that was doing very, very well but was self-correcting and cooling off a bit on its own. And we were seeing already consumption numbers coming down. We are seeing consumer confidence coming down," Gourinchas said.
"For the United States, the tariffs represent a supply shock that reduces productivity and output permanently and increases price pressures temporarily."
Regarding Australia's largest trading partner China, the IMF's downgrade is less pronounced than for the US at 0.6 percentage points to 4 per cent for 2025. This is despite China's National Bureau of Statistics recently reporting GDP growth of 5.4 per cent in the first quarter - a figure that was not incorporated in the IMF's projections.
The IMF's forecast for China was also positively impacted by fiscal support initiatives in China since the start of the year.
Gourinchas said the fact China was facing the most elevated tariffs right now would have a very significant impact on projections for the Chinese economy.
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