The world economy is holding together, but only just. In its July 2025 World Economic Outlook update, the International Monetary Fund projected global growth at 3.0 percent for 2025 and 3.1 percent for 2026, an improvement on its own April forecast but a figure that IMF Chief Economist Pierre-Olivier Gourinchas described as remaining disappointingly below the pre-COVID average.
“"Still, projections remain about 0.2 percentage point below our pre-April 2nd forecasts, indicating that the trade tensions are hurting the global economy. Global inflation continues to decline, reaching 4.2 percent in 2025 and 3.6 percent in 2026." — Pierre-Olivier Gourinchas, Chief Economist, IMF”
The upward revision from April reflects several forces working in tandem. Businesses rushed to front-load exports ahead of anticipated US tariff hikes, effective tariff rates came in lower than feared after a partial US policy reversal, financial conditions eased as the dollar weakened, and some major governments stepped up fiscal spending. The IMF noted that a US-China trade de-escalation in May reduced the US effective tariff rate from 24 percent to roughly 17 percent, offering modest but meaningful relief.
A divided world: advanced economies lag, emerging markets lead
The headline number masks a sharp divergence between richer and poorer economies. Advanced economies are set to grow at just 1.5 percent in 2025, with the eurozone expected to pick up modestly to 1.2 percent this year before slipping slightly to 1.1 percent in 2026. The United States, meanwhile, is forecast to slow from 2.8 percent growth in 2024 to 2.0 percent in 2025, as the short-term boost from fiscal stimulus and lower tariffs comes up against persistent inflation and tighter underlying conditions.
Emerging market and developing economies tell a different story. The IMF projects this group to grow at just above 4 percent in 2025, with China at 4.8 percent, supported by strong domestic consumption and fiscal expansion that helped offset trade headwinds. Latin America and the Caribbean also received a slight upward revision, reflecting stronger-than-expected data and lower effective tariff exposure. Growth in the Middle East and Central Asia is forecast to recover as the disruptions of oil production cuts and regional conflict gradually subside.
The risks that could undo the recovery
The IMF does not characterise the current resilience as durable. Risks, it says, are firmly tilted to the downside. A breakdown in trade negotiations or a renewed round of protectionism could simultaneously dampen global output and fuel inflation in import-reliant economies. Labour supply shocks tied to stricter immigration policies in advanced economies could hurt hiring and investment, particularly in countries already grappling with ageing populations. Meanwhile, the Fund warns that fiscal vulnerabilities are acute: higher real interest rates, elevated sovereign debt levels, and new spending pressures on defence are all squeezing governments' room for manoeuvre.
“"Financial conditions have eased, but they could tighten abruptly, especially in case of threats to central bank independence." — Pierre-Olivier Gourinchas, Chief Economist, IMF”
The IMF also flags the global AI investment surge as a double-edged sword. The Fund compares the current enthusiasm to the dot-com boom of the late 1990s, noting that if optimism drives up valuations and demand further, it could force central banks to tighten policy more aggressively to maintain stability. On the other hand, genuine productivity gains from AI remain a plausible upside for economies well-integrated into the global technology value chain. Gourinchas stressed that structural reforms, trade predictability, and preserved central bank independence remain the clearest paths back to stronger, sustained growth.
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