IMF warns on Trump's plans but upgrades UK outlook

The International Monetary Fund (IMF) has raised its growth forecast for the UK economy this year, while also warning about the potential impact of Donald Trump's economic plans. The institution has revised its projection for UK economic growth this year upwards to 1.6%, from a previous estimate of 1.5%.

However, the IMF noted that the wave of tariffs threatened by incoming US President Trump could exacerbate trade tensions, reduce investment, and disrupt global supply chains. While tariffs, tax cuts, and deregulation might stimulate the US economy in the short term, these policies could prove counterproductive in the long run.

The prospect of the US imposing higher tariffs on imported goods is causing concern among many world leaders, as it would increase the cost for businesses selling goods in the world's largest economy. Tariffs are central to Trump's economic vision, which he sees as a way to boost US economic growth, protect jobs, and increase tax revenue. Trump has threatened to impose tariffs on China, Canada, and Mexico on his first day in office next week, and has stated he would impose a 100% tariff on the BRICS nations if they create a currency to compete with the dollar.

The IMF stated that these policies could lead to an inflationary boom followed by a recession and could undermine the status of US Treasury bonds as a safe asset. In addition to upgrading the UK's economic outlook, the organization also believes that the UK economy will outperform European economies such as Germany, France, and Italy over the next two years. This improved forecast may be helpful for UK Chancellor Rachel Reeves, who has faced policy pressure this week due to stagnant economic data. The Labour Party has made economic growth a key goal, but Reeves has admitted the government must "do more to boost growth" to improve living standards. The latest IMF figures show the UK economy grew less than the organization had expected last year.

Responding to the IMF report, Reeves emphasized that the UK is the only G7 nation (other than the US) to have its 2025 growth forecast upgraded. Economic growth is influenced by many factors, including geopolitics and the weather, so forecasts are never perfect. But such reports can point in the right direction, especially when they are consistent with other predictions. The IMF predicts that global growth will be "stable but weak" at 3.3% for both 2025 and 2026, below the historical average of 3.7%. Its 2025 forecast is largely unchanged from previous projections, mainly because US growth is expected to be higher than previously anticipated, offsetting slower growth in other major economies.

With Trump about to return to the White House, the risk section dominated the IMF's twice-yearly World Economic Outlook report. During his previous term, Trump initiated a trade war with China, and US policies led to tit-for-tat tariffs with the EU. This time, Trump has proposed a 10% tariff on all global imports, 25% on imports from Canada and Mexico, and 60% on Chinese goods. The organization warned that an inflationary boom in the US could be followed by a recession, which could "undermine the role of US Treasuries as a global safe asset." Investors consider US Treasuries to be among the safest investments, as these bonds (similar to IOUs) are backed by the US government.

Furthermore, excessive deregulation of businesses could cause the dollar to spiral out of control, drawing funds away from emerging economies and stifling global growth. The IMF stated that Trump's policies to deport illegal immigrants could "permanently reduce potential output" and exacerbate inflation. The organization's chief economist, Pierre-Olivier Gourinchas, said the "huge uncertainty" surrounding Trump's future policies has already impacted stock markets around the world. The World Bank also warned on Thursday that US tariffs could hit trade and dampen global growth this year. The bank predicts global growth of 2.7% in 2025, which would be the weakest performance since 2019, aside from the sharp contraction seen during the peak of the Covid-19 pandemic.