IMF lifts U.S. growth outlook on lower tariffs and upbeat markets

The International Monetary Fund (IMF) has raised its U.S. growth estimates to 1.9% for 2025 and 2.0% for 2026, driven by eased U.S.-China trade tensions, loosened financial conditions, and corporate tax incentives. In contrast, the global growth outlook, while slightly revised upward, is projected to decelerate from 2024 levels, with the IMF noting that current activity reflects temporary factors and tariff distortions rather than underlying robustness. The report also highlighted a weaker U.S. dollar with uncertain long-term hedging properties, and rising U.S. inflation attributed to tariffs and the dollar's depreciation.

Analysis

The International Monetary Fund has upgraded its U.S. economic growth forecast to 1.9% for 2025 and 2.0% for 2026, driven by eased U.S.-China trade tensions, looser financial conditions, and corporate tax incentives. This outlook positions the U.S. for significantly stronger growth relative to other major developed economies, including the Euro Area (1.0% in 2025) and Japan (0.7% in 2025). However, this domestic strength contrasts with a decelerating global economy, with the IMF's global forecast of 3.0% for 2025 falling short of the 3.3% achieved in 2024. The fund's report underscores a cautious tone, characterizing the global economy's resilience as stemming from "temporary" factors and "distortions from tariffs" rather than fundamental robustness. Key underlying risks identified include a weaker U.S. dollar, with uncertainty over whether its perceived risk-hedging properties have permanently changed. This currency depreciation, along with tariffs, is showing tentative signs of inflationary pass-through to U.S. consumer prices and producer costs. Concurrently, the U.S. fiscal position is expected to weaken with a higher projected deficit, contributing to a steepening yield curve, which, while not yet above historical norms, exists alongside very high sovereign debt levels.

Key Decisions for Investors

• Given the upgraded U.S. growth forecast that outpaces other developed economies, it may be prudent to maintain an overweight allocation to U.S.-centric assets relative to those in the Euro Area and Japan.
• Investors should closely monitor U.S. inflation data and the dollar's trajectory, as the IMF flags uncertainty in the currency's hedging properties and early signs of price pass-through which could impact both equity and fixed-income valuations.
• Evaluate duration risk within fixed-income portfolios, as the combination of a higher projected U.S. fiscal deficit and rising inflation pressures presents a notable risk factor despite yields currently remaining within historical norms.