IMF Chief Warns of Trade Tensions Impact

By Andrea Shalal

WASHINGTON (Reuters) — Increased trade tensions and drastic changes in the global trading system will lead to lower economic forecasts from the IMF, but no global recession is anticipated, stated IMF Managing Director Kristalina Georgieva on Thursday.

Georgieva noted that countries’ economies are being challenged by a reshaping of the global trading landscape, triggered by U.S. tariffs and retaliatory actions from China and the European Union. This evolution has initiated unprecedented uncertainty in trade policy and extreme financial market volatility.

> “Disruptions entail costs… our new growth projections will include notable markdowns but not recession,” she mentioned in her prepared remarks, also indicating an expectation of higher inflation forecasts for some nations.

To emphasize the shift in economic circumstances, Georgieva quoted from the ‘Wizard of Oz’, stating, “We’re not in Kansas anymore.”

The raised level of uncertainty also heightens the likelihood of stress in financial markets, with Georgieva warning about recent changes in U.S. Treasury yield curves serving as a cautionary signal. “Everyone suffers if financial conditions worsen,” she remarked.

U.S. President Donald Trump has dramatically altered the global trading framework with numerous tariffs, including a 10% duty on products from all countries, alongside increased rates for certain goods, though these have been suspended for 90 days to facilitate negotiations. Retaliatory measures have been enacted by China, the EU, and other nations.

The IMF had initially projected global growth of 3.3% for 2025 and 2026, with an updated World Economic Outlook scheduled for release on Tuesday.

While Georgieva did not disclose specific revisions, she warned that prolonged economic uncertainty would incur costs and the repercussions of trade policy changes would be “significant.”

Economists surveyed by Reuters predict the aggressive U.S. tariff policies will lead to a marked slowdown in the U.S. economy this year and the next, with the probability of a recession climbing to 45%—the highest since December 2023, up from 25% the previous month.

Georgieva pointed out that trade tensions have been escalating for quite some time, but have now reached a boiling point. She advised nations to respond wisely to the sudden and comprehensive changes in tariff policies that have pushed U.S. effective tariff rates to historically high levels, prompting reactions from other countries.

“As the giants face off, smaller countries are caught in the cross currents,” Georgieva stated, emphasizing the significant implications for smaller countries exposed to tightened financial conditions.

Protectionism and Its Consequences

Georgieva cautioned that rising tariffs directly affect growth and that historical evidence suggests that higher tariffs are eventually passed on to consumers through increased costs and reduced profits for importers. While larger economies might attract new investments and create jobs over time, these benefits take a while to materialize.

> “Protectionism erodes productivity over the long run, particularly in smaller economies,” she asserted, warning that attempts to shield industries from competition could hinder entrepreneurship and stifle innovation.

She urged nations to persist in economic and financial reforms while upholding adaptable and credible monetary policies and reinforcing financial regulatory frameworks. Emerging markets should maintain exchange rate flexibility, and donor nations must better safeguard aid flows to vulnerable low-income countries.

Georgieva also called for collaborative efforts in an increasingly multi-polar world, advocating that major economies arrive at a trade agreement that promotes openness and rekindles the global trend towards lower and less restrictive tariffs.

> “We need a more resilient world economy, not a drift to division,” she stated. “All countries, large and small, can and should contribute to strengthening the global economy amidst more frequent and severe shocks.”