By Paul Hannon
A fresh wave of tariffs could revive inflation and pressure central banks to keep their key interest rates high, the International Monetary Fund warned Tuesday.
In its latest report on the outlook for the global economy, the Fund said borrowing costs could also be pushed higher by a series of elections that may lead to a surge in already high levels of government borrowing.
The Fund left its forecast for world economic growth this year unchanged at 3.2%, and raised its forecast for next year to 3.3% from 3.2%. It slightly lowered its growth forecast for the U.S. this year, and slightly raised its forecast for the eurozone.
The Fund said that inflation rates are likely to continue to fall around the world, but are declining at a slower pace than had been expected as prices of services and wages continue to increase rapidly. However, it warned that a fresh round of tariffs and other barriers to trade could push inflation rates higher, forcing central banks to maintain their key rates at currently high levels.
"Upside risks to inflation have thus increased, raising the prospect of higher-for-even-longer interest rates, in the context of escalating trade tensions and increased policy uncertainty," the IMF said.
Donald Trump has proposed a 10% tariff on all U.S. goods imports and a 60% tariff on imports from China as part of his campaign to regain the White House. Many economists believe that would push U.S. inflation higher in 2025, and investors who share that concern have been responding through a series of market positions known as the Trump trade.
But there are other signs of rising trade tensions that could have an inflationary impact. The European Union has imposed tariffs on imports of Chinese-made electrical vehicles. China has yet to respond, but may impose tariffs on some imports from the EU, including pork products.
Investors preparing for the possibility of a Trump victory in November also expect to see a rise in U.S. government borrowing as taxes are cut. That would come on top of a surge in U.S. government debt over recent years, which Federal Reserve Chairman Jerome Powell described as unsustainable earlier this month.
"The potential for significant swings in economic policy as a result of elections this year, with negative spillovers to the rest of the world, has increased the uncertainty," the IMF said.
"These potential shifts entail fiscal profligacy risks that will worsen debt dynamics, adversely affecting long-term yields."
The U.S. government is the cornerstone borrower in the global economy, and if it has to pay more to attract buyers for its debts, others will likely have to follow. Higher borrowing costs typically slow investment and economic growth.
The French government has also borrowed more heavily than expected in recent years, and recent elections have left the outlook for fiscal policy uncertain. The largest bloc of parties in the new legislature has promised changes to policy that would see borrowing rise further, and it is unlikely that measures to cut borrowing significantly would be introduced by a new government.
The IMF raised its growth forecast for the Chinese economy this year to 5% from 4.6%, responding to a recovery in exports and consumer spending in the first three months of the year. The new forecast comes a day after Chinese figures showed the economy slowed more sharply than expected in the three months through June.
The IMF also raised its growth forecasts for India and the U.K., but lowered its forecast for Japan in response to "temporary supply disruptions and weak private investment in the first quarter."
The Fund lowered its growth forecast for the U.S. this year to 2.6% from 2.7%, and raised its eurozone forecast to 0.9% from 0.8%.
Write to Paul Hannon at paul.hannon@wsj.com
(END) Dow Jones Newswires
07-16-24 0914ET
