Donald Trump’s tariff threats over Greenland risk triggering a “spiral of escalation” that would damage the world economy and lead to a sharp sell-off in financial markets, the International Monetary Fund (IMF) has said.
In an update as Trump threatened to impose tariffs on Nato allies opposed to his ambition to take over the Arctic territory from Denmark, the Washington-based fund said a renewed eruption in trade tensions was among the biggest risks to global growth in 2026.
Pierre-Olivier Gourinchas, the IMF’s chief economist, said a “spiral of escalation” between the US and Europe would have a “material impact” that would inflict pain on households on both sides of the Atlantic. “We all know there are no winners in a trade war and that’s the thing to remember,” he said.
Speaking at the launch of the Washington-based fund’s updated world economic outlook (WEO) report, Gourinchas called for both sides to find an “amicable solution” to the current situation. “If we were to enter a phase in which there were escalation, and tit-for-tat policies, that would certainly have an even more adverse effect on the economy,” he said.
The intervention comes 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 managing director, Kristalina Georgieva, is expected to hold meetings in Davos amid international efforts to dial down tensions with Washington.
In an update of its WEO report published in October, the IMF said the powerful 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.
However, the IMF forecasts were finalised in December, before an explosion in geopolitical tensions at the start of 2026, notably the US seizure of Venezuela’s president, Nicolás Maduro, the eruption of protests in Iran and Trump’s threats to seize Greenland.
The IMF said its forecasts were based on a fall in US tariff rates in 2026 and 2027, after a year in which the world economy managed to avoid the worst of the fallout from Washington’s trade war – helped by AI investment.
Gourinchas said the shock of a tit-for-tat trade war could lead to a “repricing” by financial markets. Global markets have reached record highs amid a massive influx of cash into the US technology sector.
A trade war could lead investors to “look at the situation and have to reassess what the value of financial markets is,” he said. “This volatility is bad for business decisions; it’s bad for investment, it’s bad for consumption, it leads to uncertainty,” Gourinchas added.
Reflecting the technology boom and limited impact on US consumers from the president’s trade wars so far, 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 from 1.3% to 1.4%.
The UK’s growth projection for next year puts it behind only the US and Canada of its G7 counterparts. Rachel Reeves, the chancellor, said the forecasts showed 2026 was “the year the country turns a corner”. “The IMF has upgraded our growth for the third time in a row since April 2025, putting us on course to be the fastest growing European G7 economy this year and next,” she said.
However, rising geopolitical tensions and a full-blown trade war would blow the IMF forecasts off course. “Going forward this is a major risk, this is something that could materially impact growth if we have higher levels of tariffs; if we have higher levels of geopolitical tension. That is something we are monitoring carefully,” Gourinchas said.
