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The International Monetary Fund’s October 2025 World Economic Outlook delivers a clear warning: the world may be entering an era where resilience masks erosion. While global GDP held up in early 2025, the IMF notes that persistent tariff barriers and protectionist impulses are slowly undermining the structural drivers of long-term growth. What once looked like a tactical trade shield is fast turning into a strategic liability.

From Short-Term Resilience to Long-Term Strain

Global growth, projected to slow from 3.3 % (2024) to 3.2 % (2025) and 3.1 % (2026), is running well below the pre-pandemic trend of 3.7 %. This deceleration may appear mild, yet the Fund warns that the compounding effect of trade friction, higher input costs, and redirected supply chains could prove far more corrosive than headline figures suggest.
The IMF’s modelling shows that if tariff escalation continues—particularly under renewed U.S.–China trade tensions—global output could shrink by 0.3 percentage points by 2026 and 0.6 by 2028. That is equivalent to wiping out nearly half a year of growth for several emerging economies.

Delayed Shock Effect: The Slow Burn of Tariffs

Initial 2025 data led some policymakers to assume tariffs were manageable. The Fund counters that this optimism is misplaced. Inventory drawdowns, cost pass-through to consumers, and tightening corporate margins now show that the pain was merely delayed. As Chief Economist Pierre-Olivier Gourinchas stressed, it is “premature and incorrect to claim tariffs have had no global effect.”
The pattern mirrors earlier trade-war cycles: early substitution and rerouting disguise the true cost until cross-border investment, logistics, and technology exchange begin to freeze.

Investment Confidence Falters

Beyond immediate trade volumes, the IMF highlights a more worrying dimension—the collapse of investment sentiment. Policy uncertainty and fragmented market access could reduce global investment by up to 2 % within two years. Firms deterred by opaque tariff regimes and unpredictable geopolitics are delaying capex, particularly in export-oriented industries. History reminds us that once investment momentum breaks—as in the 1930s or during the early 1980s protectionist wave—its recovery lags far behind output revival.

Country-Level Divergences

United States: Growth of 2.0 % (2025) masks rising core inflation and higher unemployment. Tariff-driven input costs are feeding directly into domestic prices, challenging the narrative of “contained impact.”

China: With growth expected to slide from 4.8 % (2025) to 4.2 % (2026), the drag of weaker exports and subdued investment underscores how decoupling cuts both ways.

India: Standing apart, India’s projection of 6.6 % (2025) reflects robust consumption and reform-driven resilience. The Fund sees India as a “regional stabilizer,” partially offsetting the Asian slowdown.

From Smoot–Hawley to Tech-Decoupling

History’s cautionary tales loom large. The Smoot–Hawley Tariff Act of 1930 triggered retaliations that deepened the Great Depression. Today’s tariff wave, though couched in strategic competition, risks a similar trap—what the IMF calls “technological decoupling”. The fragmentation of semiconductor, EV, and AI supply chains could entrench parallel economic blocs, eroding global productivity gains born of openness. Unlike the 20th century, however, modern interdependence means any sustained decoupling may exact a higher technological and welfare cost.

Cooperation or Contraction

Three possible paths emerge:

1. Managed Re-Globalization: selective openness via trusted-partner networks and digital trade frameworks could restore predictability.

2. Fragmented Regionalism: blocs form around supply-chain security, locking the world into mid-growth equilibrium.

3. Protectionist Retreat: escalating tariffs could permanently trim global potential growth below 3 %, ushering in a “low-efficiency world.”

The IMF’s message is clear—resilience today is not immunity tomorrow. A world economy built on tariff walls may stand, but it will not soar.

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