Last week the International Monetary Fund (IMF) cut its forecast for global growth this year from 3.2% to 2.8% and halved its forecast for growth in global trade.

These downgrades have been driven largely by US tariffs that are likely to weigh particularly heavily on US growth this year. The IMF expects the US to grow 1.8% this year, down from a previous forecast of 2.7%. Even this downgraded number looks optimistic. If tariffs persist at current levels, growth of well below 1.0% this year is quite plausible.

The Mexican economy is highly integrated with America’s and is particularly vulnerable to US tariffs. Last week the IMF cut its forecast for Mexican growth from 1.5% in January to -0.3%. The Fund has also lowered its forecasts for the major G7 economies and has pencilled in slower growth for emerging markets, driven by rather slower growth in China and India.

The IMF characterises the risks to its new forecasts as being “tilted to the downside”. Uncertainty about trade policy has never been higher, but this is not the whole story. The momentum of global growth started to soften before America imposed tariffs while inflation had edged up from last year’s lows.

The IMF is concerned that governments and central banks have limited capacity to respond to any marked weakening of growth. Public borrowing is running at multi-decade highs in many western countries, constraining the ability of governments to boost growth with debt-fuelled spending. In many countries, inflation expectations are above central banks’ target rates making it harder for policymakers to collapse interest rates, particularly since tariffs will themselves fuel inflation.

Unsurprisingly in the light of recent volatility in equity, bond and currency markets, the IMF thinks that the risk of financial instability has “increased significantly”.

As well as considering what might go wrong, the Fund also suggests what could go right. US tariffs could push the authorities in China towards boosting domestic demand, creating a new motor for global activity. Deeper EU integration, the policy prescription recommended in last year’s Draghi report, has the potential to reboot European productivity. The resolution of conflicts, particularly Russia’s war against Ukraine, would support growth and reconstruction. An easing of trade uncertainty and new trade agreements would boost growth.

The IMF makes clear that high tariffs spell slower growth. It is hard to see a material improvement in the outlook for global growth this year without a material change in US policy.