IMF Messages: An Apparent Calm in a More Fragile World

The International Monetary Fund (IMF) released its October 2025 World Economic Outlook and Global Financial Stability Report, drawing a picture of a global economy that appears stable on the surface yet remains fragile underneath. The reports warn that growth is slowing, trade is fragmenting, and financial vulnerabilities are deepening. While global markets show an outward calm, the Fund stresses that the balance of risks remains tilted to the downside, shaped by high debt, uneven policy alignment, and persistent uncertainty. The IMF calls on policymakers to rebuild buffers and reinforce resilience to withstand future shocks.

Key messages from both reports:

• Subdued and uneven growth across countries. Global GDP is projected to expand by 3.2 percent in 2025 and 3.1 percent in 2026, compared with 3.3 percent in 2024, reflecting slower trade, rising protectionism, and weak productivity. While downside risks persist, upside potential hinges on international cooperation and productivity gains driven by artificial intelligence. A reduction in global uncertainty or faster AI-led productivity growth could raise world output by 0.3–0.4 percentage points in the near term.
• Trade tensions. The U.S. tariff increases introduced in 2025 have slowed global trade and reshaped supply chains; the IMF estimates a cumulative global output loss of 0.2 percent through 2026.
• Diverging inflation paths. Global inflation is expected to decline to 4.2 percent in 2025 and 3.7 percent in 2026, though it will remain above target in the United States. Tariff pass-through to consumer prices remains a key risk.
• Misaligned policy mix. Fiscal policy remains expansionary in most major economies, while monetary stances diverge. In the United States, fiscal expansion raises concerns about debt sustainability, while fiscal policy in Europe is also loosening.
• Echoes of the tech bubble. The current wave of AI-related investment recalls the exuberance of the late-1990s internet era, with stretched valuations and the risk of a sharp correction if profit expectations prove unfounded. Paradoxically, AI could also become a source of stronger global productivity.
• Apparent calm, rising vulnerabilities. Financial markets appear stable, but high debt levels, stretched valuations, and the growing role of nonbank financial intermediaries (NBFIs) are heightening systemic risk.
• Stretched valuations and sovereign debt concerns. Asset prices remain elevated despite slower growth, while widening fiscal deficits are pushing up term premia and tightening the sovereign–bank nexus.
• Banks are stronger, but still exposed. Global stress tests show higher capital ratios than in 2023. The global CET1 capital ratio (a key solvency indicator) would fall moderately from 13.0 percent in 2024 to 12.3 percent under the adverse scenario. The IMF devotes special attention to the interconnections and contagion channels between banks and NBFIs.
• Expansion of stablecoins and tokenized assets. Their rapid growth could reshape money markets and monetary-policy transmission, especially in more vulnerable economies exposed to currency substitution and forced asset sales during periods of stress.
• Key recommendations. The IMF calls for strengthening fiscal buffers and policy credibility, ensuring sustainable fiscal consolidation and preserving central-bank independence. It urges the full implementation of Basel III to reinforce bank capital and liquidity and broaden the macroprudential perimeter to address emerging risks from NBFIs and digital assets. Structurally, the IMF advocates reviving predictable, rules-based trade, aligning industrial policy with productivity rather than protectionism, and enhancing multilateral cooperation to reduce fragmentation and bolster global resilience.