Transcription
I want to talk about the business of forecasting. It's a conversation Matt and I were just having in the context of Wall Street sell side strategies, but it sounds like it's something that economists are running into as well, that as the goalposts of trade policy and trade discussions keep changing, it's difficult to keep up.
Well, it certainly has been quite challenging in the last few months and since our April projections in our spring report and even in the Willow update, we're just having we see developments almost day by day. We had announcements on the US EU trade deal. We had the US Japan announcement not too long ago and and I could go on and on. And so of course we are trying to take all of that on board as best we can. But at some point we need to stop the clock and see where we are and that's what we're doing with this. We will update.
So we see from your update that the global economic growth expectations are diminished versus the expectations previous to Liberation Day. Do you see a recovery in the next few years? Because I think the Trump administration all along has said there will be some pain shorter term, in order to rearrange global trade. Longer term.
Well, what we are saying is, is it's sort of a glass half full, glass half empty kind of situation. We are seeing a modest upward revision in our growth projection compared to April. But April, when we are we had our last round was really at a point where the tariffs that were announced were very elevated on a number of countries. And so some of the upwards revision we have some of the upgrade is on the back of the modest easing of trade tensions. So that's the glass half full, the glass half empty is that even with this modest easing, the tariffs are here and the tariffs are sizable. We are expecting tariffs of the order of 17%, sort of the average tariff of the US on the rest of the world. We were at levels that were less than 3% when word as of as of last year, so very sizable increase in the level of tariffs. And so when you compare where we are now compared to where we were expecting to be before tariffs were announced in early April, then growth is actually revised down.
Now, where is it going to go? Well, we are here. The important thing to keep in mind is medium term growth has been relatively weak in the recent years and is expected to continue being being weak. We have much lower long term medium term growth than we used to have, let's say ten, 15 years ago. And so that's a concern here, is that the tariffs are actually going to add to that tepid, mediocre, medium term growth and may not necessarily be reverted anytime soon.
Let's talk specifically about the US, because you raised your GDP outlook for 2025 to 1.9% and then a very slight acceleration to 2% growth in 2026. And it feels like with every important economic release that we get, we take out our magnifying glass and we try to find tariffs and trade policy somewhere in those releases. And you think about the US economy specifically, it feels like the labor market is holding up. It feels like inflation really has remained under control. But take a look at the numbers that you put out this morning. It sounds like where we could see the impact is just an overall robustness in overall growth of this economy.
Yeah. So we were seeing a slight uptick in in growth for the US in 2025, 1.9%. Some of that again reflects the fact that the tariffs are not as bad as they were expected back in April. That is helping a little bit. What has helped also the US economy is an easing of financial conditions. Markets have been doing, equity markets have been doing really well and have more than recovered since the April 1st few weeks of April, when we are seeing also a depreciation of the US dollar. The depreciation of the US dollar is is helping amplify, in effect, the tariff shock because it's making foreign goods more expensive, both because in their own currency they are now becoming more expensive when you convert that into dollars and also because they are facing the tariffs. So it's amplifying the tariff shock and it's making U.S. goods more competitive. So that is also helping a little bit. But then the other thing that you have is the, of course, the budget bill that was just recently passed that is going to have a modest expansionary effect on the US economy, especially in 2026. That's behind the upward revision. We have to 2% for next year.
So now stepping back, do we see the effect of the tariffs yet? Well, it's starting to appear, but it will be building up. Where do we see that starting to appear? When we see that, when we're looking at the impact of the tariffs on domestic prices, we're seeing some signs of transmission into domestic prices. When we look at the June CPI and we expect that will continue. And when we when we're looking at the effect of this tariff, the import prices in dollars for foreign goods that are brought into the US have not decreased. So the impact of the tariff comes on top and the tariffs are effectively at this point this could change, but at this point they are likely to be paid by the importers, the distributors and retailers, and eventually by customers who have to pay for those more expensive goods. And that is going to increase production cost in the US. That is going to be passed on to prices. That's going to be the channel through which it's raising price pressures in the US economy. But it's going to take time. We expect that to unfold in the second half of the year and into next year here.
Olivier, I want to ask a step back and ask a broader question. While you were getting your Ph.D. at MIT or rather a decade before that, Peter Navarro was across town at Harvard studying why capital moves where it does. Can you understand what this administration is trying to do? I mean, can you sort of get it intellectually or do you think they're going wrong?
Well, I think the way I would approach your question and, you know, you're referencing to the Stone Age here back when I was doing my Ph.D., So we're looking at a long, long time ago. But the big question here is the U.S. is concerned about its external deficits, its trade deficit, which is mostly in goods and services. It's not necessarily the case, but overall, its trade and current account deficit, it's concerned about that. It's a legitimate concern. In fact, this is one of the things that we at the IMF watch very closely. If you're running a deficit, then other countries are running surpluses. We know where these surpluses are. And here I'm looking at global deficit and surpluses, not the bilateral ones. And we know that some countries have large surpluses. You look at China, you look at the European Union. So there is a question about whether deficits and surpluses can be too big. And that's again, that's something that we look at very closely.
Now, our assessment is that tariffs and trade policy, as is being implemented, has very little chance of actually significantly reducing these deficits. There's external deficits of the US. Why do I say that? Well, because when we look at what's driving this, it's mostly coming from domestic policies that are contributing to these deficits. And chief among them in the US is fiscal policy, a fiscal policy with six 7% public deficits in the last year, expected to continue with the budget bill that was passed where some of the additional weather tax cuts that have been implemented will be partly offset by tariff revenues. But on that it still will add to the debt. And this is to us, this is the primary way in which this external deficit should be addressed, not through raising tariffs, which is like throwing sands in the wheels of the global economy is making everyone worse off.