Forecasting a Moving Target
Notwithstanding significant downward revisions by the IMF, the risks of a full-blown global recession are high and rising.
While forecasting is never easy, today, it’s next to impossible. The unpredictable behavior of a volatile US president has turned the conditional forecasting exercise into a crap shoot. The IMF research team has just taken a first stab at rethinking the global growth prognosis in the face of Trump‘s tariff war. The April 2025 issue of the World Economic Outlook presents a noble effort to try and make sense of a world in chaos, bordering on crisis.
Unsurprisingly, the IMF sounded the official alarm. The broad thrust of the IMF’s forecast revisions — slower output and higher inflation — captures the stagflationary implications of a global tariff war, consistent with my own thinking. To be sure, this forecast is flailing at a moving target. Starting with a “reference scenario,” which effectively freezes global tariffs at sharply elevated April 4 levels, the IMF has reduced its global GDP growth forecast for 2025 to 2.8% (from 3.3%); for 2026, global growth is cut to 3.0% (from 3.3%). Curiously, allowing for subsequent tariff actions between April 4 and 14 — including the 90-day pause on most of the “Liberation Day” actions of April 2 — does little to alter these numbers. By IMF standards of the past two decades, these are very large downward revisions — surpassed only by forecast cuts made during the Global Financial Crisis, the COVID shock, and the outbreak of the war in Ukraine. As I argued last month, it makes good sense to treat the current situation as another global crisis.
By contrast, the IMF’s global CPI inflation prognosis is revised up fractionally to 4.3% in 2025 (from 4.2%). On the surface, that’s not exactly a compelling validation of the inflation dimension of stagflation. That shows up more in the shifting mix of global inflation — an upward revision of 0.4 percentage point for CPI-based inflation in the advanced economies to 2.5%, offset by a fractional downward revision of inflation in emerging market and developing economies to 5.5% in 2025. For advanced economies, upward revisions to inflation are most pronounced in the US, where sticky services inflation has been problematic, and in the UK. By contrast, China’s flirtation with outright deflation limits the tariff-related inflationary consequences for the developing economy aggerate.
The IMF’s updated global prognosis is perfectly reasonable as a benchmark, a starting point to assess the prognosis of a world in an extraordinary state of flux. But, as stressed above, the problem is the “state of flux” — a world economy that is as much of a moving target as it has ever been in major crises of the past. No one, including Donald Trump as the instigator of the tariff war, has the foggiest idea of where US tariffs and any subsequent tit-for-tat retaliation will eventually shake out. With that obvious and important caveat in mind, three key forecast risks are worth noting:
Global trade. Early signs point to an imminent contraction of global trade. While the IMF has cut its already subdued baseline global trade forecast for 2025 to a 1.7% increase (from 3.2%), the risks remain decidedly on the downside. As per recent warnings of the World Trade Organization, sharp declines are likely in North American trade (the US, Canada, and Mexico), and there are worrisome indications of a contraction in pan-ASEAN trade — one of the world’s most trade-intensive regions. By way of comparison, global trade volumes contracted by an average of 9% in 2009 (GFC) and 2020 (COVID). In both of those instances, the negative impacts on the global trade cycle were second-order effects — collateral damage from financial shocks (GFC) and temporary supply chain disruptions (COVID). By contrast, the current tariff shock takes dead aim on cross-border trade, making it a far more worrisome, and potentially longer lasting, first-order threat to global trade. As I warned last week, contractions in global trade are almost always associated with recessions in global output. I am hard-pressed to believe this time will be a rare exception.
Output mix. As always, the devil is in the detail — in this case the detail of country-specific forecasts. The IMF has marked down real GDP growth significantly in the world’s two leading economies — by an average of -0.65% in the US and by -0.8% in China (on a fourth quarter-to-fourth quarter basis for 2025-26). To the extent that this is a reasonable baseline prognosis for gauging the direct impacts of the global tariff shock, I would stress the downside risks to the far more limited reductions the IMF has made to its forecasts of growth in Europe ( -0.25%), Japan (-0.3%), and Latin America (-0.35%). For these export-intensive regions, all of which are heavily dependent on external demand from both the US and China, it seems reasonable for forecast adjustments to be in closer conformity with much sharper downward adjustments to US and Chinese growth. Closing half this gap would be enough, in and of itself, to knock another 0.2% to 0.4% off overall global growth estimates for 2025-26. That would be sufficient to take the world economy dangerously close to the 2.0% to 2.5% recession threshold. [Note: The IMF now dubs 2.0% to be the global recession threshold versus the 2.5% that I have long stressed, drawing on support from World Bank research; with the exception of the mild global recession of 2001, which did not qualify by IMF standards, turning point signals are unaffected by this distinction.]
Financial stability. Despite heightened volatility of financial markets since the April 2 Liberation Day sell-off, broad asset values have yet to discount full-blown recession. At the same time, trade and economic policy uncertainty metrics remain at all-time highs, underscoring the distinct possibility of additional shocks. Moreover, there have been hints of a “sell America” trade in world financial markets — a weakening of the US dollar, unusual congestion in the long-dated US Treasury market, and underperformance of US equities. Many, but not all of these risks are duly noted in the IMF’s latest Global Financial Stability Report (April 2025); an exception is the potential for investor rejection of “American exceptionalism,” the special premium long afforded to US dollar-denominated assets. All this underscores the potential for heightened risk to world financial markets that could lead to negative wealth effects and cross-border asset contagion, the combination of which poses an additional set of stability risks that are not fully aligned with the IMF’s downwardly revised reference prognosis for the global economy.
Downside risks notwithstanding, there’s always the possibility that the world will turn out to be more resilient than I suspect. The April WEO makes note of several factors that might mitigate the downside and provide more impetus to the upside than I have stressed above — namely growth dividends from artificial intelligence, long-awaited structural reforms, as well as conflict resolution in war-torn regions (especially Ukraine-Russia). At the top of their list of optimistic possibilities would be an “Art of the Deal” type breakthrough in driving so-called next-generation trade agreements. While none of these possible sources of resilience can be dismissed, they are likely to be more consequential for the medium or longer term. In the meantime, specifically over the next two years, I would judge the risks on the downside to outweigh those on the upside by a factor of at least three to one.
As the former head of a leading global economic forecasting team at Morgan Stanley, I have long viewed IMF forecasts as the gold standard of the global forecasting business. The combination of country-specific expertise, state-of-the-art macro analytics, market surveillance, policy insights, and risk assessment is unparalleled. All of these considerations were brought to bear on the latest forecasting exercise just published in the April 2025 WEO. Yet, in the end, judgment is key in making the final call on any forecast. The IMF forecast team has its share of mistakes — the Asian crisis of the late 1990s comes to mind — but rare are those (including yours truly) who haven’t had a glaring error.
My bottom line on downside risk assessment to 2025-26 comes from my own experience as a macro forecaster. First impressions are always hard to decipher. What seems initially like slow motion can change quite rapidly; the crisis-denial syndrome is a very human reaction to the unpredictable dynamics of dramatic shifts in business cycles. I saw this firsthand from my Morgan Stanely perch during the Asian Financial Crisis of 1997-98 and the Global Financial Crisis of 2008-09, and again from the Yale vantage point during the COVID shock of 2020. I could always be wrong, but I have a strong feeling that the same crisis-denial syndrome is in play today. The risks of a full-blown global recession are high and rising.