The global economy in an era of chaos

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How is the global economy standing? The answer is as my colleague Tej Parikh says Recently noticedis that it’s confusing. That shouldn’t be surprising. Beyond some obvious macroeconomic uncertainties – disturbing trends in fiscal deficits and debt in several important countries, for example – we are witnessing two huge events: the abdication of global dominance by the United States, and the uncontrolled onset of what may turn out to be the most important of all human technological innovations, or artificial intelligence. No wonder we are so confused. But what is striking is how well the global economy has dealt with shocks and uncertainty, at least so far.

This is the main theme of both the introductory speech of Kristalina Georgieva, Director of the International Monetary Fund, To this year’s annual meetings in Washington and the latest Global economic prospects. The big takeaway is that the IMF sees growth slowing relatively little this year and next. Needless to say, any such conclusion is itself highly uncertain. But it’s in line with what’s happened so far this year, despite the turmoil.

Why has the global economy been relatively strong? Georgieva (and the World Economic Outlook) offer four explanations: the consequences of the tariffs are less severe than feared; Private sector capacity to adapt; Supportive financial conditions; and improving policy fundamentals. (See charts.)

First, it is indeed true that tariffs ended up somewhat lower than initially indicated on Donald Trump’s “Liberation Day,” April 2, 2025. Ultimately, Georgieva says, “the U.S. trade-weighted tariff rate has fallen from 23% in April to 17.5% now.” Moreover, there was little retaliation. However, these tariffs are still high.

Second, the private sector has responded in a helpful way. This was especially true in the short term. Thus, the World Economic Outlook notes, “households and firms loaded up on consumption and investment early in anticipation of higher tariffs.” Furthermore, implementation delays allowed companies to postpone price changes. In addition, exporters and importers absorbed some price increases. However, crossing over does occur. Tariffs are a devastating tax: they will ultimately distort the structure and growth of global output.

Third, equity markets continued to boom, and financial conditions remained broadly supportive. Part of the reason for this, especially in the United States, is the boom in investment in artificial intelligence. It is not known whether this is rooted in reality or whether it is a kind of bubble that often accompanied such innovation.

The fourth characteristic appears to apply particularly to emerging economies. Many have learned from the painful experiences of the past and have therefore pursued more disciplined fiscal and monetary policies than they were accustomed to. This is the topic of the second chapter of the World Economic Outlook. The problem is that external circumstances are unlikely to get any easier for many of them. China is grappling with American hostility and internal weaknesses. Brazil and India were hit by criminally high US tariffs of 50 percent. In Brazil’s case, this is largely because its courts, recalling its military dictatorships, put its would-be dictator, Jair Bolsonaro, in power. In prison for 27 years. So why does Trump hate this so much?

At a time like this, when the world order is upended, it is dangerous to be confident in what lies ahead. As the IMF points out, there are many vulnerabilities, particularly fiscal deficits and debt. The report notes, for example, that the ratio of general government fiscal balance to GDP is expected to deteriorate by about 0.5 percentage points in 2026, largely due to “passage of the Big Beautiful Bill (OBBBA) and despite the displacement of about 0.7 percentage points of GDP from projected tariff revenues.” This makes significant reductions in global current account imbalances unlikely, although the IMF expects modest reductions.

This, in turn, would herald further skirmishes in the global trade war, especially between the United States and China. Aside from Trump’s tendency to view any bilateral trade surplus as evidence that his partner is plundering the United States, China is also seen as a comprehensive strategic rival. The United States is particularly dismayed by China’s use of its trade muscle in these battles. US Treasury Secretary Scott Besent accused China of trying to harm the global economy after Beijing imposed strict controls on exports of rare earths and important minerals. So how does Besant imagine American victims will feel about the trade war being waged against them?

The meetings of the International Monetary Fund and the World Bank constitute an opportunity not only to consider the general state of the global economy and the significant risks resulting from further imbalance, but also to focus in particular on the conditions of the poorest countries and peoples. “The world’s poorest economies, including those experiencing protracted conflicts, are particularly at risk of seeing their growth momentum slow,” the World Economic Outlook notes. One reason for this is the reduction in grants and soft lending. The sudden closure of USAID is likely to have particular health significance. A realistic study published in The scalpel He concludes that dismantling the agency “could lead to more than 14 million additional deaths by 2030.”

The International Monetary Fund and World Bank were created in 1944 to establish the principle of global economic cooperation. Certainly, the need for this has not ended yet. It is encouraging that the United States remains a member. The challenges ahead are huge, not least the need to maintain economic progress at a time of such geopolitical turmoil. No country, no matter how powerful, will be safe if the global economic system explodes.

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