Market News

Richard Partington Senior economics correspondent

The International Monetary Fund has warned mounting geopolitical tensions and an escalation of Donald Trump’s tariff war could hit global economic growth and trigger a backlash in financial markets.

In an update as Trump threatens to impose tariffs on Nato allies opposed to his ambitions in Greenland, the Washington-based fund said a renewed eruption in trade tensions was among the biggest risks to global growth in 2026.

As world leaders prepare to gather in Davos, Switzerland, for the annual World Economic Forum meeting – widely seen as a critical moment to salvage international cooperation – the IMF said a breakdown in relations between the world’s most powerful nations would have damaging consequences.

Setting out the risks to its World Economic Outlook (WEO) report, it said renewed trade tensions could blow its forecasts off course by “prolonging uncertainty and weighing more heavily on activity”.

The eruption of geopolitical tensions could also result in “introducing new layers of uncertainty and disrupting the global economy through their impact on financial markets, supply chains, and commodity prices”.

In an update of its WEO report published in October, the IMF said headwinds from global trade tensions in 2025 had been offset by surging investment in technology – including artificial intelligence – in the US and Europe.

It said global growth was projected to remain resilient at 3.3% in 2026 and 3.2% in 2027: rates similar to an estimated 3.3% growth rate in 2025 after surging investment in AI helped the world economy offset the impact from trade tensions.

The IMF issued a sharp upgrade for US growth to 2.4% this year, up from its prediction in October for growth of 2.1%.

It suggested there were also signs that “technology-related investment had contributed to activity” in Spain and the UK, although not at the same scale as in the US.

The fund left its forecasts for the UK unchanged for 2026 and 2027, predicting growth of 1.3% this year and 1.5% the year after. However, it also issued a modest upgrade for its prediction for 2025, up by a percentage point to 1.4%.

The UK’s growth projection for next year puts it behind only the US and Canada of its G7 counterparts.

Trump has said he would place sanctions on eight European nations, including the UK, that have deployed troops to Greenland in response to US threats over its future.

A joint statement by the affected countries on Sunday said Trump’s threats “undermine transatlantic relations and risk a dangerous downward spiral”.