Uncertainty remains as trade tensions risk fresh flare ups, says IMF in its World Economic Outlook

Despite some decline, trade tensions remain vulnerable to occasional flare-ups, and policy uncertainty remains much higher than in January 2025, the IMF said in its January 19 World Economic Outlook update.

The IMF expects global growth to remain resilient at 3.3% in 2026 and 3.2% in 2027, broadly in line with the estimated 3.3% expansion in 2025. The forecast calls for a slight upward revision for 2026 and no change for 2027 compared with the October 2025 forecast. The fund said the flat headline numbers mask the balance of divergent forces across the global economy.

Headwinds from changing trade policies continue to impact activity, even as recent developments have helped stabilize tensions. A dispute between the United States and China over controls on exports of semiconductors and rare earth metals was followed by a truce that reduced bilateral tariffs until November 2026 and introduced a pause on export controls.

The United States also eliminated tariffs on some agricultural products for all countries, offsetting higher tariffs on some sectors that were previously announced and are now in effect. As a result, the IMF said the overall US effective tariff rate remains broadly unchanged from assumptions made in October, although changes in certain countries could be meaningful.

These trade-related headwinds are offset by tailwinds from rising investment related to technology, including artificial intelligence, especially in North America and Asia. Accommodative financial conditions, fiscal and monetary support, and private sector adaptability also helped maintain global momentum, the IMF said.

Global financial conditions remain broadly accommodative despite some volatility and higher sovereign yields. Stock markets showed increasing divergence, with the share prices of major technology companies moving away from the rest of the market. The International Monetary Fund noted that overall financial conditions have changed little or have tightened only moderately.

The global headline inflation rate is expected to decline gradually, falling from 4.1% in 2025 to 3.8% in 2026 and then to 3.4% in 2027. Inflation expectations are generally unchanged from October forecasts. However, the IMF said inflation is expected to return to target more slowly in the United States than in other large economies.

Despite the resilience of the baseline, risks to the outlook remain skewed to the downside. The International Monetary Fund warned that a reassessment of productivity growth expectations related to artificial intelligence could dampen investment and lead to a sudden correction in the financial market. Renewed trade tensions, domestic political or geopolitical unrest, and rising public debt and fiscal deficits could further disrupt financial markets, supply chains, and commodity prices, impacting global growth.