Political unrest in nations ranging from France to Japan and new trade tensions between the two biggest economies in the world are the backdrop against which policymakers are meeting.
As American consumers continued to spend, businesses tolerated increased expenses, and an AI boom powered a new breed of animal spirits, the global economy has so far survived the most intense round of US tariffs since the 1930s.
However, President Donald Trump’s most recent threat to put steep tariffs on goods from China has heightened concerns about another global economic shock, adding to warnings of a technology market bubble and rising public debt.
These issues will be the main focus of the finance ministers’ and central bankers’ meeting this week when they go to Washington for the annual meetings of the World Bank and the International Monetary Fund. Meetings on the sidelines will also focus heavily on the US’s $20 billion lifeline to support Argentina’s currency and plans to release blocked Russian assets for Ukraine.
Political unrest in nations ranging from France to Japan and new trade tensions between the two biggest economies in the world are the backdrop against which policymakers are meeting.
The economy was in far worse shape when they were last in Washington, DC, in April. Financial markets trembled when Trump announced “Liberation Day” tariffs, and policymakers were concerned about a global recession characterized by trade retaliation, rising inflation, and a lack of investment.
However, the majority of shocks during the last six months have been positive, particularly in the biggest economy in the world.
The second quarter had the strongest growth in the US GDP in over two years. The S&P 500 Index has risen 32% from a low in April, despite Trump’s new tariff threats weighing heavily on markets on Friday. Artificial intelligence and record investment in data centers required to enable cloud computing are the foundations of both stocks and the actual economy.
Instead of passing the expense of additional charges on to customers, businesses have so far managed the tariff disruptions by accepting lower profits and temporarily fattening stockpiles.
During a briefing this week, Karen Dynan, a Harvard University economics professor and nonresident senior scholar at the Peterson Institute for International Economics, said, “This resilience has been encouraging, but I do not believe it is sustainable.” “There will be a slowdown in the global economy.”
The US president acknowledged that he might back out of the escalation if the Chinese backed down from threatening limitations on rare earths, but he announced on Friday that he will impose an extra 100% tax on China starting on November 1.
According to Bloomberg Economics’ most recent projections, global economic growth would slow down in 2019. Economists predict that the real gross domestic product will rise 2.9% the next year and 3.2% in 2025, which is the same as last year.
Increasing Debt
During the Washington talks, rising debt for both developed and developing countries is expected to be a major topic. According to the Institute of International Finance, the amount of global debt increased by almost $21 trillion in the first half, reaching a record of about $338 trillion. This growth was comparable to that which occurred throughout the pandemic.
Another important subject will be the Trump administration’s initiatives to support Argentina’s economy ahead of this month’s midterm elections. In April, despite strong internal opposition, the IMF decided to extend its loan to Argentina. Kristalina Georgieva, the managing director of the fund, has recently engaged in discussions with Argentinean and US authorities.
Because businesses paused recruiting, US payroll growth turned out to be far worse than anticipated. The manufacturing sector in the US completely lost employment for four months in a row. In September, a gauge of manufacturing activity in China continued its downward trend for a sixth consecutive month, marking the longest decrease since 2019. Germany’s export-dependent car industry are in a state of shock after the country’s economy shrank far more than first predicted in the second quarter.
The World Trade Organization said on October 7 that it anticipates a major slowdown in global goods trade growth in the next year, which is a result of Trump’s tariffs. The Geneva-based group predicts that merchandise trade volumes would increase by only 0.5% in 2026, as opposed to 2.4% this year.
“Global economic challenges are becoming more severe,” said Frederic Neumann, chief Asia economist at Hong Kong’s HSBC Holdings Plc. Payback from previous front loading seems imminent, despite the allure of thinking that US tariffs would not have an impact on global export volumes.
Whether rising costs will ultimately derail US consumers and have an impact on the rest of the globe is still one of the most important issues. Nathan Sheets, global chief economist at Citigroup Inc., said that “there is another shoe to drop,” even though the effect of tariffs on global economic activity has been less severe and transient than anticipated earlier this year.
In a recent note, Sheets and colleagues predicted that global GDP would fall to below 2% in the second half and then rebound to 2.5% next year. They wrote, “The tariffs are increasingly hurting, which is expected to entail more softness in US consumption and import demand.”
Based on previous import-price shocks, Stephen Jen, CEO of Eurizon SLJ Capital, estimates that it might take six to eight quarters for the tariff shock to negatively impact consumption and drive US economic growth to zero.
In a recent letter, he said, “Instead of a single 13% tsunami, tariff shocks have been amortized into half a dozen pieces of 2% import price shocks.”
Mike Brundidge, the owner of Acme Food Sales Inc. in Seattle, which imports food items like canned tuna and coconut water from throughout the globe for large US retail chains, is among those cautioning that the tariff shock is not yet over.
He has so far taken part of the brunt of the blow and transferred some expenses to his customers. However, he warns that more price increases are imminent.
There are very few things in life that are definite, but I can assure you that grocery store costs are rising for customers. “There is just no avoiding it,” he said.
Fragility of Technology
The reversal of the AI euphoria is another immediate worry.
In an apparent allusion to the dot-com bubble that burst in 2000, IMF Managing Director Kristalina Georgieva said in a speech on Wednesday that “today’s values are moving toward levels we experienced during the bullishness about the Internet 25 years ago.” “Tighter financial conditions might hinder global development, reveal weaknesses, and make life particularly difficult for poor nations if a dramatic correction were to occur.”
A US-focused tech downturn, according to a scenario Oxford Economics forecast, would push the largest economy in the world closer to a recession and reduce global growth to 2% in 2026 from a baseline of 2.5%, with the potential for an even worse damage.
This is why, in addition to the ongoing uncertainty around tariffs, analysts are also paying more attention to the IT industry for vulnerabilities. Alexis Crow, chief economist at PwC US, says the AI craze does not always lend itself to a longer-term economic engine.
“Whether or whether this investment boom will result in long-term increases in productivity and, therefore, a significant acceleration of GDP is still up for debate,” she said.