ExplainSpeaking: Key takeaways from IMF's latest World Economic Outlook on India, the US, and the world

Indian Express

6 days ago

Dear Readers,
On Tuesday (July 29), the International Monetary Fund (IMF) released the latest update of its World Economic Outlook (WEO). The IMF has 191 member countries, and its overall goal is to strive for their 'sustainable growth and prosperity'. It does so by fostering international trade, economic growth, and policies that encourage countries to cooperate, especially when it comes to monetary policy (that is, how each country manages its currency and finances).
The WEO is the IMF's benchmark publication as it provides a comprehensive picture of the global economy as well as details of individual countries. The IMF releases the WEO twice every year, in April and October, apart from updating it twice — in January and July. The document released on Tuesday is the July update to the WEO released in April.
The broader message is captured by the title of the update — 'Global Economy: Tenuous Resilience amid Persistent Uncertainty'. There are two main takeaways for the state of the global economy.
First, the global economy has proven to be resilient, albeit tenuous, and second, the outlook is plagued by persistent uncertainty.
Since the start of 2020, there has been no dearth of reasons to expect a global recession and a prolonged and broad-based slowdown in economic growth. First came the Covid-19 pandemic that created a once-in-a-lifetime economic and health disruption for all economies. It led to a spike in inflation thanks to the destruction of supply chains that had allowed goods to be traded seamlessly across the world.
It also resulted in governments wildly exceeding their budget deficits — the difference between their expenditures and revenues — because while income from taxation fell because of lower economic activity, expenditures spiked with governments providing subsidies of all kinds to allay the economic ill-effects of the pandemic.
By the time the world started coming out of its impact, February 2022 saw Russia invade Ukraine. That conflict, which is still ongoing, created an even bigger spike in inflation because supplies of several essential commodities, from foodgrains to fertilisers to crude oil plummeted suddenly even as consumers were flush with subsidy money. The net result was an inflation rate — the rate at which prices rise year on year — reaching historic levels. This, in turn, forced central banks across the world to raise interest rates sharply in a bid to contain inflation.
Between a spike in inflation and the sudden reversal of monetary policy, every economic entity — be it governments, individual companies or even reputed banks and pension funds — faced an existential threat.
Then, in January this year, when the world economy was starting to stabilise yet again, came the tariff onslaught unleashed by the second Trump Administration. The hike in tariffs — and counter tariffs — effectively works like an oil price shock; raising costs without raising production or productivity.
And yet, despite all these upheavals, the global economy has managed to continue growing. That is the meaning of resilience. According to the latest update by the IMF: 'Global growth is projected at 3.0 percent for 2025 and 3.1 percent in 2026. The forecast for 2025 is 0.2 percentage point higher than that in the reference forecast of the April 2025 World Economic Outlook (WEO) and 0.1 percentage point higher for 2026.'
However, this resilience is 'tenuous' (that is, unstable or with weak foundations). That's because, while the tariff situation isn't as bad as it appeared in April when US President Donald Trump first announced them on Liberation Day, it is not as if there is enough clarity about the eventual tariff rates.
'The new equilibrium could be one with tariff rates similar to those today, or it could be one in which rates are much higher, negotiations break down, and an escalation of protectionist measures restarts. Resetting tariff rates to the levels of April 2 or higher (as mentioned in the US administration's letters to trade partners) on August 1 and implementing tariffs as high as 50 percent on copper as currently pronounced would dampen global growth,' states the IMF.
To be sure, a possible rebound in effective tariff rates is just one source of continued uncertainty.
Another big downside risk comes from the geopolitical tensions (such as the ones in the Middle East and Ukraine), which could 'disrupt global supply chains and push commodity prices up'.
Yet another worry is the growing build-up of debt, as governments continue to borrow far in excess of prudential norms. Higher government debt, especially in the so-called Advanced Economies, is pushing up interest rates. That's because it is now riskier to lend to governments because they are borrowing so much more.
But the higher costs of borrowings will not be limited to developed economies; the worst affected by this push in interest rate might be the developing economies which need to borrow money for a longer period and where projects (read a massive infrastructure project) are considered to be much more risky than lending to the government of a first world country.
What about the individual countries?
The broad growth data hides considerable variation in the economic prospects of different countries.
Source: IMF
The US, from where most of the policy uncertainty is emanating at present, is expected to lose growth momentum in 2025, as against the past two years. By the end of 2025, US GDP would be close to $31 trillion. While the forecast in July is a marginal improvement (by 0.1 percentage point) over the April forecast, it is undeniable that the so-called 'Trump data' is worse than 'Biden data'. In 2026, the US growth is expected to slow down even further to just 1.2%.
In sharp contrast, China, which is the main economic threat to the US, is expected to slow down only marginally and still manage to grow at a respectable rate of 4.8% for an economy with an annual GDP of over $19 trillion. In fact, China's GDP forecast for 2025 received the biggest upgrade — almost a full percentage point — against the April WEO (which pegged China's GDP growth at 4%).
The Euro area, with a combined GDP of over $16 trillion, is also expected to grow at a rate faster than in the past two years. However, the biggest economy here — Germany — continues to witness economic stagnation.
Immediately outside the Euro area, the UK is set to improve over the past two years, although the growth rate is expected to remain fairly weak at 1.2%.
Japan's economy will improve its growth rate over 2024, but barely so, while the Russian economy will finally start to show the ill-effects of prolonged military conflict.
India continues to be a bright spot in the global economy. It is expected to grow 6.4% in 2025. While this rate is substantially slower than 2023, the fact is that by growing at over 6% in a world where competing economies are struggling to grow even at one-third that rate, India is fast bridging the gap and ensuring that it overtakes one developed economy after another, at least in terms of total GDP.
Lastly, Pakistan is expected to build on turning around its economic growth momentum, even though its growth rate is anaemic for an economy as small with a GDP of just around $380 billion.
What can India do to further boost its economic growth rate? Share your views and queries at [e-mail]
Take care,
Udit
Udit Misra is Deputy Associate Editor. Follow him on Twitter @ieuditmisra ... Read More