Trade uncertainty to leave lasting scars

With IMF-World Bank Spring Meetings week now behind us, it is clear that the damage to the global economy from the Trump administration’s tariff policy volatility is well under way.

White House damage control

The downbeat mood persisted throughout the week despite messaging from the White House that managed to partially assuage market fears.

Trump himself has backed down from earlier statements to fire Federal Reserve chair Jerome Powell, who has done a remarkable job in not responding to any of his critics and focusing instead on Fed policy.

U.S. Treasury Secretary Scott Bessent also assuaged investors by stating that the tariff dispute with China would de-escalate and that there would be no decoupling between the world’s two largest economies.

Bessent also noted that the administration was conducting bilateral negotiations with 14 countries simultaneously, perhaps a maximum for post-DOGE bandwidth.

He also affirmed the U.S. commitment to preserving the Bretton Woods system, including the IMF and the World Bank, though there could be deep reforms ahead.

These positive noises emanating from the administration are also linked to U.S. CEOs impressing upon the Trump the possibility of empty shelves absent any tariff compromises with trading partners.

IMF slashes U.S. growth forecast

Yet the blockbuster announcement coming out of the meetings is the IMF revising its U.S. growth forecast downwards by a full percentage point for 2025 and 2026. The Fund has also cut its expectations for global growth significantly.

The actual numbers of these forecasts matter little given the prevailing uncertainty, with the IMF providing a “reference forecast” rather than a baseline scenario.

What is clear is that tariff shock is going to be a big one, even if Trump were to walk everything back immediately.

The damage comes from uncertainty, as businesses manage their supply chains; consumers consider how to spend and save; and as trading partners figure out how to respond.

While many companies and households remain in wait-and-see mode, others are rushing to buy imported goods before tariffs take full effect.

This last point on import front-loading suggests that the trade drop-off could be severe in the coming months, suggesting that the growth shock could be even worse than the IMF is predicting.

Although the past ten years have witnessed the steady rise of anti-globalization, populist politics in many parts of the world, Trump 2.0 seems to mark a paradigm shift for the global economic order.

We have moved from the post-Cold War era of open capital flows, flexible exchange rates, independent monetary policy, and free trade, to a new era more focused on national sovereignty.

Despite all these ructions, the IMF still sees the US as the fastest growing developed market. Moreover, the Fund does not forecast a U.S. recession in 2025, even if the likelihood has increased.

Another silver lining from the economic outlook is that emerging market growth is now projected to be faster than in developed markets, owing to the U.S. slowdown.

While this relative growth advantage doesn’t negate the strong, negative impact of U.S. tariffs on many EMs, it does provide nimble investors with ample opportunities to pivot to the EM universe as they allocate away from U.S. assets.

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