The International Monetary Fund (IMF) has revised its medium-term forecast, increasing its expectations for global growth in 2025 and 2026 after U.S. trade tensions have eased. However, the IMF warned that ongoing uncertainty, especially regarding U.S. trade policy, still looms over the world economy.
Tariff de‑escalation spurs upward revisions
On July 29, 2025, the IMF raised world GDP growth in 2025 to 3.0%, up from 2.8% in its projection in April, and improved its forecast for 2026 to 3.1%. Its cause was a retreat from Trump’s administration protectionist plans.
Trump had threatened 30% tariffs on goods from countries like the EU, UK, China, and South Korea earlier this year. But with the speculation building, markets crashed, and the U.S. dollar plummeted, forcing investors to move to “safe havens.”
Instead of enforcing harsh punitive tariffs, the administration introduced watered-down versions. These were linked to foreign commitments to buy American goods. Step by step, it retreated from its most aggressive trade targets.Among the recent developments:
A 15% tariff EU agreement was reached. In return, Europe agreed to import nearly £600 billion in U.S. oil and gas. France’s prime minister called it ‘a dark day’ for Europe.
Japan was willing to buy Boeing aircraft. In return, it received equally limited tariff concessions.China only saw reduced tariffs after it retaliated by imposing duties on rare earth elements.
As a result, the effective rate of U.S. tariffs dropped significantly. It fell from an estimated 24% to around 17%, reducing the shock to global trade flows.
What the upgrade implies by geography
Most of the globe basked in this better global environment. The United Kingdom, for example, had its growth forecast for 2025 raised to 1.2%, from previous forecasts.
Together with that, the IMF lifted its projections for the other big economies:
- United States: Projection revised upward to 1.9% growth in 2025, to 2.0% in 2026, partly due to the projected impact from tax cuts signed into law on 4 July.
- China: 2025 growth forecast raised to 4.8%, up 0.8 percentage points from April, driven by lower-than-expected tariffs and strong regional demand for exports.
- Eurozone: Raised to 1.0% growth, driven disproportionately by Ireland’s pharma exports into the top-line number.
- India: Once again set to lead the charge among the larger economies, with growth of 6.4% forecast both for 2025 and 2026.
Regardless of this, the IMF emphasises a key point. While a modest rise did occur, total world growth remains weak. In the coming years, it stays below the record 3.7% average seen from 2000 to 2019.
Trade momentum and short‑term distortions
A one-off, anomalous surge in trade volume in the first part of 2025 was partly driven by companies front-running imports ahead of pending tariff hikes. Frenzied stock-building briefly underpinned growth in trade, even as the global economy was weakening.
Trade flows are now expected to grow by 2.6% in 2025. This marks a strong rebound from the 1.7% forecast in April. However, trade growth will slow to 1.9% in 2026 ,The slowdown reflects the fading effect of the post-tariff import boom.
IMF’s message of caution
IMF chief economist Pierre-Olivier Gourinchas hailed the rollback in tariffs but cautioned. He noted that tariffs remain historically high, trade agreements globally remain in shortage, and policy uncertainty remains “highly elevated.”
Gourinchas referred to the 1 August deadline when a few nations such as Vietnam and South Korea have to conclude deals with the U.S. or else they may resurrect uncertainty and stifle investment.
Yet another warning sign is political pressure on central bank independence. Trump’s personal public attack on Fed Chairman Jerome Powell, like calling for interest rate cuts and calling him a “numbskull”, triggered IMF warnings that erosion of central bank independence would risk undermining inflation stability.
U.S. trade data: deficit narrowing
June’s U.S. volume of goods imports fell by $11.5 billion to $264.2 billion, probably indicating the post-tariff boost levelling out. The U.S. trade deficit thus fell from $96.4 billion in May to $86.0 billion in June. That decline indicates diminished foreign competition and will likely sustain domestic producers in the short term, but also demonstrates lopsided global demand.
Outlook skewed to the downside
Despite the optimistic revisions, the IMF cautioned that the outlook is still skewed to the downside. Full trade escalation or breakdown of diplomatic agreements can reduce forecasted global GDP growth by up to 0.2 percentage points.
Apart from this, the uncertainty is also not exclusively trade-related. The EU-U.S. pact WTO-violating imposition of pharma tariffs, for example, has been attacked by European pharmaceutical manufacturers.
The EFPIA warned that blanket 15% tariffs on drugs would risk destroying supply chains, stifling R&D investment, and putting patients across the Atlantic at risk.
What it means for markets and investors
Markets reacted to the tariff de‑escalation with a rally. Stocks regained losses incurred during spring months, and the U.S. dollar, which had dropped nearly 9% so far in 2025, recovered some strength, easing financial conditions for emerging markets with dollar‑denominated debt.
However, politicians and investors need to tread carefully. The IMF stresses that short-term symbolic deals and front-loaded trade cannot take the place of long-term structural deals. There remains a very real danger of a return to tariffs, a central bank credibility crisis, or geopolitical tensions and these could swiftly reverse recent progress.
Final reflections
The IMF’s July forecast is a modest but considerable rebound in world economic projections for 2025 and 2026. The elimination of Trump threats to raise tariffs has encouraged trade flows, boosted equity markets, and prompted upbeat revisions in growth forecasts of leading economies.
But the optimism is conditional. Trade remains impeded by high tariffs and low formal contracts, policy uncertainty remains in place, and monetary independence, especially in the U.S., is under challenge. As Gourinchas warns, the gains are fragile.
For policymakers and investors, the message is that although markets have been allowed to catch their breath, structural trade tensions loom large. A sustainable, enduring rebound will hinge on whether these early diplomatic moves are followed by fully executed, implementable trade agreements.
Disclaimer: This material is for general informational and educational purposes only and should not be considered investment advice or an investment recommendation. T4Trade is not responsible for any data provided by third parties referenced or hyperlinked in this communication.
