Over the past two decades, the world economy has staggered from one shock to another: the financial crisis; Donald Trump’s first-term trade war on China; the pandemic; post-pandemic inflation; Russia’s invasion of Ukraine; the war in the Middle East; and now Trump II’s “let’s-blow-the-world-economy-up-for-fun” trade war, which has brought average US tariffs back to levels not seen for over a century, with possibly more to come if “reciprocal tariffs” are reimposed. (See charts.)
It is the job of the IMF to make sense of what this unnecessary shock might mean for the world economy. In its latest World Economic Outlook, it does its very best to do so. This does not mean it knows. Nobody does. Beyond the fragilities bequeathed by previous turmoil and the usual ignorance of how our complex global economy operates, we all face the huge difficulty that we have no idea what Trump will do next or, for that matter, how others will act in reply.
As a result, the biggest reality we can identify, apart from the prohibitive tariffs imposed by the US and China on each other, is the elevated uncertainty. This is itself economically paralysing. Indeed, one of the many depressing realities of the Trump administration is its failure to understand that, in a free society, arguably the most important role of government is to reduce uncertainty, not do whatever it can to raise it.