Commentary

The IMF’s World Economic Outlook and the impact on capital markets

calendar icon 25 April 2025
time icon 2 mins

Spokesperson

Chris Arcari
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Chris Arcari

Head of Capital Markets

Commenting on the IMF’s World Economic Outlook and the impact on capital markets, Chris Arcari, Head of Capital Markets, Hymans Robertson says:

“Global growth forecasts are down since the year began, owing to the rise in the US average effective tariff rate. The US – alongside economies dependent on exports to the US – will be most affected, with the impact extended as global supply chains are disrupted. Uncertainty will also weigh on consumer spending and business investment. This presents downside risks to corporate earnings forecasts, which have slipped recently. This week, the IMF’s World Economic Outlook joined the chorus of professional forecasters issuing growth downgrades. While the UK has limited exposure to the direct impact of tariffs, given its small manufacturing sector and deficit in goods trade with the US, the IMF expects the broader growth slowdown to affect UK activity. We tend to agree with the IMF, however, about the potential upside of more proactive fiscal and monetary policy to support growth outside the US. A more isolationist US is also spurring European governments to dramatically increase defence spending, while emphasising the need to invest in ageing infrastructure. Chinese policymakers may focus stimulus on domestic consumers: export-led growth, which has offset weak domestic demand, could become harder to deliver as trade headwinds intensify.

“The US is being hit by both supply and demand shocks, with tariffs expected to raise near-term inflation while inhibiting growth. For other economies, US tariffs mainly represent an external demand shock, but their inflationary impact is uncertain. Falling commodity prices and currency appreciation against the dollar will lower headline inflation, but some imported goods could become cheaper as exports previously destined for the US enter different markets. On the other hand, the scale of US tariffs could damage global supply chains, raising inflation. Consensus forecasts suggest UK inflation will be the highest in the G7 this year, averaging 3.1% year-on-year. This is expected to be closely linked to energy prices and, therefore, be temporary. But strong wage and service-sector inflation both point to underlying domestic-driven pressures. 

"Global equities are less expensive than at the start of the year, but they’re still not cheap. Meanwhile, earnings look elevated relative to trend, and the likelihood of reversion has increased, as global earnings forecasts continue to slip. Valuations don’t feel like they’ve fallen enough to offset this risk to medium-term returns, so we retain a degree of caution. Despite US underperformance in the year to date, US equity market concentration is high, and the US continues to trade at a premium to both its own history and global benchmarks. Credit spreads have risen since the start of 2025, amid trade uncertainty and growth concerns. That said, credit spreads began their ascent from historically low levels. Credit is not necessarily cheap, and credit spreads tend to overshoot in risk-off environments. However, long-term investors who had been underweight because of low spreads could find themselves considering a more neutral position. We see attractive value in UK gilts, given high forward yields relative to economic fundamentals, but we expect yield volatility to persist in the near term. The pound is cheap versus the US dollar, based on the real effective exchange rate relative to its long-term trend. But having gained 5.7% over the year to date, the dollar is less obviously expensive relative to sterling.”

A copy of our Capital Markets Spring update can be downloaded here.