2025-04-23
IMF projections: trade tariffs and policy uncertainty hold back economic growth, important to boost productivity and ensure public finance discipline
In the face of increased uncertainty and trade tariffs, the International Monetary Fund (IMF) has revised down its growth projections for global economy and international trade. The IMF calls on policymakers to address emerging tensions in a constructive manner and to ensure a stable and predictable international trade environment, achieve fiscal sustainability, and implement structural reforms that could boost productivity and restore economic growth potential.
Gediminas Šimkus, Chair of the Board of Lietuvos bankas, will participate in the IMF Spring Meetings this week and meet with Pierre-Olivier Gourinchas, Chief Economist of the IMF, as well as Bo Li and Gita Gopinath, Deputy Managing Directors of the IMF, to discuss the main risks to the euro area and Lithuania’s economy outlook.
“The trade tariff conflict is yet another shock to the global economy. This will stifle the growth of the European economy, which also puts Lithuania at risk. Although Lithuania is a small open economy susceptible to changes in international trade, our business has been able to withstand the recent shocks due to the successful diversification of export markets. We must further strengthen our resilience and compete in export markets based on quality and high value-added, rather than relying on cheap labour force,” says Šimkus.
On Tuesday, the IMF published new economic projections for the world, including Lithuania, covering international trade tariffs announced before 4 April. Despite the new trade restrictions, the IMF foresees a slightly faster growth of the Lithuanian economy in 2025: this year the country’s gross domestic product (GDP) is expected to rise by 2.8% (+0.2 percentage points compared to the October forecast). Next year, however, growth will be slightly slower than previously expected at 2.5% (-0.2 percentage points). The IMF has also revised up its projections for price growth: this year inflation is expected to accelerate to 3.5% (+0.7 percentage points) and reach 2.8% next year (+0.2 percentage points). The unemployment rate should decrease from 7.1% last year to 6.6% this year and 6.1% next year.
Trade tariffs will significantly slow down the global economy, but a recession in major economies will be avoided. The global economic growth rate is currently significantly lower than the potential one: after reaching the growth of 3.3% last year, global GDP will expand by 2.8% this year and by 3% next year (-0.5 and 0.3 percentage points respectively as revised, compared to the January forecast). Global price growth is set to further weaken—after reaching 5.7% last year, inflation will slow down to 4.3% this year and 3.3% next year. The IMF stresses that these projections are surrounded by extremely high uncertainty about policymakers’ decisions, and the impact of the tariffs on the economy will ultimately depend on various impact channels, including the development of economic agents’ expectations.
Tariffs will also severely inhibit the growth of international trade. After growing by 3.8% last year, international trade will pick up by a mere 1.7% this year (-1.5 percentage points), and next year the growth is expected to recover only partially, reaching 2.5% (-0.8 percentage points).
The US will face significantly slower economic growth due to policy uncertainty, trade tensions and weaker domestic demand, while rapid price growth will continue, primarily due to the imposition of tariffs on imports. After expanding by 2.8% last year, GDP growth will moderate to 1.8% this year (-0.9 percentage points), followed by a similar pace of 1.7% next year (-0.4 percentage points). This year inflation will be much faster than expected, reaching 3% (+1.1 percentage points), and is set to slow down to 2.5% next year (+0.4 percentage points).
The already weak economic growth in the euro area will further slightly decelerate, mainly due to heightened uncertainty and tariffs imposed by trading partners on euro area exports, but this negative impact will be slightly offset by the increase in defence spending. This year, the euro area GDP is expected to grow by 0.8% (-0.2 percentage points) and by 1.2% next year (-0.2 percentage points). Inflation should return to the European Central Bank’s target rate: after reaching 2.4% last year, it will slow down to 2.1% (+0.1 percentage points) this year and to 1.9% next year (-0.1 percentage points).
China’s economic growth will also lose momentum, with the US imposing the highest tariffs on imports from China among all countries. This year and next, the country’s GDP will expand by 4% each year (-0.6 and -0.5 percentage points as revised for this year and next).
Making recommendations on policy measures, the IMF first highlights the importance of a stable and predictable trading environment and encourages countries to take constructive decisions to defuse tensions and reduce restrictions on trade and investment. The IMF also stresses the importance of sustainability of public finances: resolute, yet growth-friendly, fiscal consolidation is needed, while meeting important spending needs on national and economic security. The IMF also urges to undertake structural reforms to enhance potential economic growth, recommending that the European Union deepen the integration of the single market, as well as complete the capital markets union, which would contribute to investment and productivity growth and reduce global imbalances.
At this year’s IMF and World Bank Spring Meetings Gediminas Šimkus will meet with the IMF’s Deputy Managing Directors Bo Li and Gita Gopinath, as well as Pierre-Olivier Gourinchas, Chief Economist of the IMF. The Chair of the Board of Lietuvos bankas will convey the expectation that the IMF will continue to closely examine the impact of international trade barriers and climate change on the economy, as well as discuss the impact of trade tariffs on the growth, inflation and supply chains in the euro area and Lithuania. In addition, Šimkus will participate in an event organised by the Reinventing Bretton Woods Committee, where he will discuss monetary policy in the face of supply shocks and tariffs.
The delegation of Lietuvos bankas will continue to focus on Ukraine, which is defending against the Russian aggression. They will meet with the representative of Ukraine at the IMF Executive Board, Vladyslav Rashkovan, as well as a team of IMF experts on Ukraine. Šimkus will also meet with Lithuanian, German and euro area IMF expert teams.
The IMF is an organisation uniting 191 countries. It strives for sustainable economic growth and prosperity for all its members. Lithuania has been a member of the IMF since 1992 where it is represented by the head of its central bank.