Global growth is losing altitude as 2025’s tariff surge works its way through the economy, the International Monetary Fund warned in its October outlook.
The Fund now sees world output expanding 3.2% this year and 3.1% in 2026, a modest step down from last year’s baseline as the negative supply shock from trade policy runs its course.
Early damage proved smaller than feared because Washington carved out exemptions, most partners avoided tit for tat responses, and firms rerouted sourcing.
The IMF cautioned that the full pass through to consumer prices and efficiency may still lie ahead. Pierre-Olivier Gourinchas wrote that the outlook remains fragile.
IMF staff finds much of the burden resting on U.S. importers, with limited retail price gains to date, though that restraint may not last as contracts roll off and margins compress.
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Tighter immigration policy is shrinking the foreign born labor supply in the United States even as looser financial conditions, a softer dollar earlier this year, and an investment boom tied to artificial intelligence support demand.
In tariff hit economies, China has leaned on a weaker real exchange rate, redirected exports to Asia and Europe, and fiscal support, while Germany’s fiscal expansion has helped lift euro area growth from a low base.
The IMF says the statutory effective tariff rate remains high, which can raise input costs and erode productivity if trade keeps rerouting.
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Earlier moves such as new tariffs on home goods show how targeted measures can ripple through prices and supply chains. If firms pass on more of these costs, inflation could prove sticky even as goods disinflation fades
Ottawa has already used budget levers to cushion exposure, including a tariff relief program aimed at small firms in British Columbia hurt by earlier disruptions.
The Bank of Canada’s 2% inflation goal anchors expectations, but the IMF’s warning on higher for longer prices from supply shocks suggests rate cuts will proceed carefully, and only as underlying inflation allows.
The Fund argues that clearer bilateral and multilateral agreements could lift global output by roughly 0.4% in the near term, with a return to pre-January 2025 tariff settings adding another 0.3%. Combined with productivity gains from AI, the near term boost could approach 1%.
Debates over how AI is taking over jobs and the economy will intensify, but the bigger test is whether governments can pair innovation with rules that keep inflation anchored and growth sustainable.
