IMF slashes global growth forecast in latest fall-out from Donald Trump trade war

The International Monetary Fund has slashed its forecasts for the global economy amid US President .

The Washington-based body now predicts growth of 2.8% this year and 3% next - wiping a combined 0.8 percentage points off its January predictions. While avoiding a , it warned: “The global economic system under which most countries have operated for the last 80 years is being reset, ushering the into a new era.”

The UK economy is predicted to grow by 1.1% this year, 0.5 percentage points less than January's forecast, partly reflecting tariffs, as well as weaker consumption amid higher inflation driven by bills and energy price hikes. Growth will nonetheless be stronger in the UK than Germany - which is predicted to flatline this year - France, and Italy.

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Chancellor , who is flying to Washington for the IMF’s spring meeting, seized on its upgrading of the UK’s growth forecasts - by 0.1% - for 2028 and 2029. “This forecast shows that the UK is still the fastest growing European G7 country,” she said. “The IMF have recognised that this government is delivering reform which will drive up long-term growth in the UK, through our Plan for Change. The report also clearly shows that the world has changed, which is why I will be in Washington this week defending British interests and making the case for free and fair trade.”

The IMF said the Bank of England could afford to cut interest rates three more times this year, in a boost for mortgage and other borrowers. Pierre-Olivier Gourinchas, the watchdog's chief economist, said a predicted rise in UK inflation was mostly due to energy prices and would "fade away", paving the way for rates to be cut. The Bank of England's base rate is 4.5% but its monetary policy committee meets early next month.

In its latest report, the IMF said President Trump’s original sky-high tariff policy - before his 90 day “pause” for most countries - took levies beyond those seen in the Great Depression. “If sustained, this abrupt increase in tariffs and attendant uncertainty will significantly slow global growth,” it warned.

But in a blow to President Trump, the IMF warned the US would be among the countries hard hit by the ongoing uncertainty and ramping-up of tit-for-tat tariffs with . It slashed its forecast for the US economy this year by 0.9 percentage points, to 1.8%, with the impact of tariffs accounting for nearly half of the downgrade. Crucially, it also raised our US inflation forecast by about one percentage point.

The report came as financial markets continued to be rattled by President Trump’s attack on Jerome Powell, head of the US central bank, branding him a “major loser” for not lowering interest rates. Trillions of dollars were wiped off US stock markets on Monday after investors were spooked, with experts saying it undermined the bank’s all-important independence on monetary policy. The IMF appeared to wade into the row, saying: Monetary policy credibility will be important in all cases, and central bank independence remains a cornerstone

Its World Economic Outlook forecast includes tariff announcements made by President Trump between February 1 and April 4, and retaliation by other countries. It also modelled the possible impact of measures announced after that point, when the White House halted most tariffs but hiked those on China. “This pause, even if extended indefinitely, does not materially change the global outlook compared to the reference forecast,” the IMF warned. “This is because the overall effective tariff rate of the United States and China remains elevated even if some initially highly tariffed countries will now benefit.” The IMF also lowered its growth forecast for China or this year to 4%, and for the eurozone to just 0.8%.

Meanwhile, inflation forecasts have been revised upwards for advanced economies since January, with the UK and the US being hit hardest. UK inflation is set to be 0.7 percentage points higher this year, compared with the previous forecast, at 3.1% - largely due to prices like water and electricity rising from April. This is higher than all other countries in the group of seven advanced economies (G7), which incorporates Germany, France, Italy, Japan, Canada, and the US.

While the IMF believes the world will avoid recession, the risk of it happening has jumped. Mr Gourinchas said: "While we are not projecting a downturn, the risk it may happen has increased from 17% in October to 30% now."

It came as a Bank of England policymaker said US trade tariffs are more likely to push down on UK inflation than up, but that there are risks on both sides. Megan Greene told Bloomberg: “The tariffs represent more of a disinflationary risk than an inflationary risk.” However, she added: “There’s a tonne of uncertainty around this, but there are both inflationary and disinflationary forces.”

The Bank is widely expected to cut the base interest rate to 4.25% in May, after ’s wave of trade tariffs slashed expectations for economic growth in the UK and beyond. The US has imposed a 10% import tariff on goods coming from the UK, a policy which also applies to many other countries.

Ms Greene said potential outcomes like export substitution would likely push inflation down. And “trade diversion from other countries that are trying to find a new home for their markets, that also pushes down on inflation,” she added.

However, the risks in the opposite direction include “a re-patterning of supply chains (that) can push up on inflation”. And “trade fragmentation writ large... tends to reduce knowledge spillovers. That reduces potential growth, that tends to be inflationary.” She said that a recent surge in the value of the pound compared to the US dollar, if it were to continue, could also push down on inflation. “If the dollar continues to depreciate on balance that would be disinflationary for the UK,” she said. However, she added that it is “too early to say where the dust settles on currencies.

Ms Greene also addressed the introduction of rising employer taxes, in the form of employer national insurance contributions (Nics). She said there are “no signs” of rising unemployment as a result of the policy, which came into force at the start of April. With the increase in Nics, combined with a rising minimum wage, “the big risk is that there could be a shakeout in the labour market. We could see unemployment tick up,” she said. “There are no signs of that yet, actually, even though the Nics and the national living wage have come to be.”