Global growth fragile
While India shows resilience, the IMF warned that global growth remains fragile, with risks still tilted to the downside, with persistent fragility despite easing trade tensions. The IMF now expects global growth to decline from 3.3% in 2024 to 3.2% in 2025, down 20 basis points from its July update of 3.4%, while the 2026 outlook remains unchanged from July, at 3.1%.Over the medium term, the world economy is expected to expand at an average annual pace of 3.2% from 2027 to 2030, a persistently lacklustre performance compared with the pre-pandemic (2000–19) historical average of 3.7%.
“The increase in tariffs and its effect has been smaller than expected so far. We now project global growth at 3.2 percent this year and 3.1 percent next year, a cumulative downgrade of 0.2 percentage point since our forecast a year earlier,” noted Pierre-Olivier Gourinchas, Chief Economist of the International Monetary Fund.
Gourinchas said it would, however, be premature and incorrect to conclude that the shock triggered by the tariff surge had no effect on global growth.
“Premature because the US statutory effective tariff rate remains high and trade tensions continue to flare up with no guarantee yet on lasting trade agreements. Past experience suggests that it may take a long time before the full picture emerges. So far, the incidence of the tariffs seems to fall squarely on US importers, with import prices (excluding tariffs) mostly unchanged, and limited retail price increases. But they may still pass costs onto US consumers, as some have started to do, and trade may reroute permanently, leading to global efficiency losses,” he said.
“Incorrect because other economic forces besides trade policy are simultaneously at play. In the United States, tighter immigration policies are shrinking the foreign-born labor supply—another negative supply shock on top of that from tariffs. So far, this has been offset by cooling labor demand, keeping unemployment steady. Financial conditions remain loose, the dollar has softened in the first half of the year, and AI-driven investment is booming. These demand-side forces are supporting activity, while adding further to the price pressures from the negative supply shocks,” Gourinchas added.
“Medium-term growth prospects are dimming for about two-thirds of the world economy,” the IMF said, noting that emerging market and middle-income economies face the most pronounced slowdown. The poorest nations, particularly those affected by prolonged conflict, are at heightened risk of seeing growth momentum decelerate.
Immigration and growth implications
The report also highlighted the role of immigration in shaping medium-term growth. On average, roughly 15% of populations in advanced economies are immigrants. In the United States, new immigration policies could reduce GDP by 0.3-0.7% annually, IMF warned.
Advanced Economies are expected to grow at 1.6% in 2025, up 10 basis points from July, and remain at 1.6% in 2026. The United States is projected to grow at 1.9% in 2025 and 2% in 2026, up 10 basis points from July in both years. The Euro area is expected to expand 1.2% in 2025 (up 20 basis points vs July) and 1.1% in 2026 (down 10 basis points vs July).
Emerging Market and Developing Economies (EMDEs) are projected to grow 4.2% in 2025 (up 10 basis points vs July) and 4% in 2026. China’s growth is expected at 4.8% in 2025 and 4.2% in 2026, unchanged from July estimates.
Commodities and inflation
Global trade is forecast to decline modestly over the five-year horizon. Fuel prices are projected to fall 7.9% in 2025 and 3.7% in 2026. Global headline inflation is expected to ease to 4.2% in 2025 and 3.7% in 2026 under baseline assumptions, IMF said.
Risks: AI boom, trade, and geopolitics
The IMF warned that risks to the outlook remain tilted to the downside. “Overall, despite a steady first half, the outlook remains fragile, and risks remain tilted to the downside. The main risk is that tariffs may increase further from renewed and unresolved trade tensions, which, coupled with supply chain disruptions, could lower global output by 0.3 percent next year,” said IMF’s Chief Economist.
Upside factors include breakthroughs in trade negotiations, faster structural reforms, and productivity gains from artificial intelligence (AI). However, downside risks include prolonged trade uncertainty, shocks to labour supply, fiscal vulnerabilities, financial market fragilities, and sudden repricing of new technologies.
On AI specifically, the IMF warned that excessively optimistic expectations could trigger a market correction. “A potential bust of the AI boom could rival the dot-com crash of 2000–01 in severity,” the report said, highlighting concerns over high valuations, concentrated market dominance, and the role of less-regulated private credit loans. Such a correction could erode household wealth, dampen consumption, and slow economic recovery.
“Despite multiple offsetting drivers, the tariff shock is further dimming already lacklustre growth prospects. We expect a slowdown in the second half of this year, with only a partial recovery in 2026, and, compared to last October’s projections, inflation is expected to be persistently higher. Even in the United States, growth is weaker and inflation higher than we projected last year—hallmarks of a negative supply shock, said Pierre-Olivier Gourinchas.
Policy recommendations
The IMF urged policymakers to rebuild fiscal buffers, preserve monetary independence while managing divergent inflation paths, promote structural reforms, and lower trade uncertainty through durable multilateral agreements. Supporting vulnerable economies hit by aid cuts and tighter financing conditions was also emphasized.
“Clearer and more stable trade agreements could raise global output by 0.4% in the near term. Combined with AI-driven productivity gains, the upside could reach about 1%,” the IMF said.
“Beyond short-term stability, we must invest more in the future. Governments should empower private entrepreneurs to innovate and thrive. Productivity fuels sustainable growth, and the progress of AI, with the right guardrails, can help lift medium-term prospects…A pragmatic and adaptive multilateral system that fosters cooperation can help us meet these challenges,” said IMF’s Chief Economist.
