Challenges in Predicting Future Economic Growth
- US Trade Policy Uncertainty: The imposition of reciprocal tariffs by the US and the uncertainty about trade agreements have significantly complicated the work of economic forecasters and business planners.
- Questions persist regarding the number of trade deals the US will secure and the tariff levels. Further uncertainties arise about the continuation of prohibitive tariffs on China and whether negotiations will be extended.
IMF‘s Economic Assessment: Three Scenarios
- Reference Forecast: The IMF’s April World Economic Outlook (WEO) presents three different scenarios:
- Reference Forecast (based on announcements as of April 4).
- Forecast with March data.
- Post-April 9 Forecast incorporating implications of the tariff pause and additional concessions.
Global Growth Projections
- Global Growth Forecast: The global growth rate is expected to decline from 3.3% in 2024 to 2.8% in 2025, followed by a recovery to 3% in 2026.
- Impact of US Trade Policy: Global growth is revised down by 50 basis points for 2025. The US growth forecast for 2025 has also been reduced by 90 basis points to 1.8%.
- China’s Growth Forecast: China’s growth is projected to slow, with a 60 basis point reduction, expected to grow at 4% in 2025.
Impact on India’s Growth
- India’s Projected Growth: India’s economy is forecasted to grow at 6.2% in 2024, which is 30 basis points lower than earlier projections. However, the overall impact on India remains marginal in comparison to other global economies.
Trade and Inflation Impact
- Global Trade Volumes: The growth in global trade volumes is expected to decline from 3.8% in 2024 to 1.7% in 2025, impacted by the trade policy shock.
- Global Supply Chains: A significant disruption in global supply chains could occur, leading to reallocation of resources in less competitive ways, ultimately impacting productivity and growth.
- Higher Inflation: The tariff-related disruptions may contribute to higher inflation, with the US inflation rate projection being revised upwards by 100 basis points.
US Economic and Monetary Impact
- Federal Reserve’s Response: The US Federal Reserve may face increased inflationary pressure, affecting its policy decisions. Chairman Jerome Powell has acknowledged the potential for persistent inflation due to tariffs.
- Impact on US Financial Markets: The uncertainty around US trade policy could cause further volatility in US financial markets and influence the value of the US dollar, potentially tightening financial conditions.
India’s Position and Strategy
- While India’s growth impact is limited so far, it is crucial for policy managers to stay alert to the evolving situation.
- Best Bet for India: The early conclusion of bilateral trade talks with the US is considered to be India’s optimal strategy to mitigate the risks associated with ongoing uncertainties.
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