The pundits were wrong: Trump tariffs are not impacting the world economy

The IMF has upgraded its forecast for world economic growth a second time. It now projects growth of 3.2 per cent for the world economy, a tad below growth of 3.4 per cent in 2024. 

In April, the IMF had forecast growth of 2.8 per cent. The projection must hav been prepared ahead of Trump's Liberation Day announcement but Trump's stance of tariffs in general was well known. In September, tariffs went into effect. 

From the day, Trump assumed office, the pundits have been predicting apocalypse for the US economy and the world economy. Well, it ain't happening. 

IMF Managing Director Kristalina Georgieva offers several explanations but these are not entirely persuasive:

• Policy making has improved especially in the emerging economies: Well, the improvement didn't happen in the last six months. The IMF should have built this element into its foecasts
• Private sector agents front-loaded their orders to beat tariffs and corporate balance sheets are healthier than before: Again, the latter was known. As for front-loading, that too should have been expected. And that shouldn't make a difference in 2026- for which the IMF has a projection of 3.1 per cent global growth, 0.1 per cent below that of 2025
• Tariffs are not as bad as expected, the US weighted average tariff is at around 19 per cent, which is below the 30 per cent feared earlier: But it's still a lot worse than the 3.5 per cent level before Trump! The free trade regime is being upended and it's not a making a big difference. 
• Financial conditions are supportive, equity prices have surged thanks to AI stocks and the surge has boosted consumption: The AI revolution has been in the works for some time. If the AI effect is overwhelming the impact of protectionism, that too should have been taken into account. The dollar has depreciated but it hasn't collapsed following any exit by investors, as was forecast.

To put it bluntly, the IMF, like so many economic pundits, got it wrong. After the turbulence in the market following Liberation Day, Trump said hat things would settle down- and it seems he has got it right.

There's an interesting observation that FT commentator Chris Giles makes in his article on the IMF forecasts. He says the IMF as wrong is saying that pre-pandemic growth was 3.7 per cent and the world outlook has turned gloomy because we are now looking at 3 per cent growth.  

The reality is that the pre-pandemic average growth rate was 3.4 per cent when using the full set of data in the IMF database, not 3.7 per cent. The higher figure relies on giving much more weight to the boom years before the global financial crisis and limiting the sample to 2000-2019. The 3 per cent medium-term future growth rate relates to the average over six quarters, starting in the second half of 2025 to the end of 2026. After that it climbs back to an average of 3.2 per cent a year, which is hardly lower than the long-term average.

In other words, the IMF is fiddling with the numbers to tell a story it wants to!