The head of the IMF on Thursday warned that the healthiest global economy in years is threatened by rising debt levels, volatile financial markets and a simmering trade dispute between the world’s two biggest economies.
A US-China trade war “will not be something that will affect only the two countries because the world is so interconnected. It will affect the global economy,” IMF managing director Christine Lagarde said.
For now, the IMF expects the global economy to grow 3.9 percent this year, the fastest since 2011, but “we are seeing more clouds accumulating on the horizon,” Lagarde said.
She cited trade tensions and rising global debts, which have hit a record US$164 trillion and said that government debt in advanced economies is at the highest level since World War II.
Lagarde’s comments came at a news conference to open the spring meetings of the 189-nation IMF and its sister lending organization, the World Bank.
The three days of talks are also to include discussions among the G20, which account for more than 80 percent of global economic output.
The US is being represented by Secretary of the Treasury Steven Mnuchin and Federal Reserve Chairman Jerome Powell.
The US’ imposition of tariffs on steel and aluminum imports and its consideration of penalty tariffs on up to US$150 billion of Chinese imports are part of a strategy to level the playing field on trade and reduce the US’ huge trade deficits with China and other nations, Mnuchin said in an interview with the Fox Business Network.
“Our objective with China is to have free and fair and reciprocal trade,” Mnuchin said.
The spring meetings are occurring as the global economy enjoys a broad-based rebound — with most regions recording growth — for the first time since the 2008 financial crisis sent the world into a deep recession.
However, the expansion is vulnerable, Lagarde said.
Stock prices are unusually high, but have been battered by growing concerns about US President Donald Trump’s aggressive “America First” trade policies. The turbulence comes as the Fed ratchets up US interest rates from the record low levels where they had been in the decade after the financial crisis.
While the Fed has been raising rates at a gradual pace, Lagarde said there could be consequences if the Fed were to accelerate the pace of its rate hikes.
A rapid succession of rate hikes could push down stock prices and potentially hurt developing countries that have come to rely on foreign investment, she said.
To guard against these risks, countries should take advantage of the good times to reduce their debt, giving them room to ramp to combat a downturn, Lagarde said.
All countries should “steer clear of all protectionism measures,” she said.
Lagarde did not directly criticize Trump’s hardball trade policies, but she urged countries not to abandon seven decades of international cooperation that she credited with “helping to reduce poverty and deliver more progress for more people than at any time in history.”
The US and China should emphasize negotiations rather than imposing tit-for-tat tariffs on each other, she said, adding that Winston Churchill’s advice that “chat-chat” was better than “war-war,” is still valid.
Her “strong recommendation” is that both countries should emphasize quiet negotiations, Lagarde said.
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