The global economy is experiencing a “synchronized slowdown,” the new head of the IMF said on Tuesday, warning that it would worsen if governments failed to resolve trade disputes and support growth.
In a blunt inaugural speech since taking the helm of the global lender on Tuesday last week, IMF managing director Kristalina Georgieva said that trade tensions had “substantially weakened” manufacturing and investment activity worldwide.
“There is a serious risk that services and consumption could soon be affected,” she said.
The cumulative effect of trade disputes could mean a US$700 billion reduction in global GDP by next year, or about 0.8 percent, she said, previewing new research to be unveiled during IMF and World Bank annual meetings next week.
“In this scenario, the whole economy of Switzerland disappears,” Georgieva said.
The research takes into account US President Donald Trump’s announced and planned tariff increases on Chinese imports, or about US$300 billion of goods.
Much of the GDP loss would come from a decline in business confidence, productivity losses from broken supply chains and negative market reactions, she said.
“In 2019, we expect slower growth in nearly 90 percent of the world. The global economy is now in a synchronized slowdown. This means that growth this year will fall to its lowest rate since the beginning of the decade,” Georgieva said.
The situation is a stark contrast from two years ago, before the US-China trade dispute started, when nations representing nearly 75 percent of the world’s output were seeing accelerating growth, she said.
The Bulgarian economist, a former EU official who was previously World Bank Group chief executive, said that trade growth had “come to a near standstill.”
She warned that fractures in trade could lead to changes that last a generation, including “broken supply chains, siloed trade sectors [and] a ‘digital Berlin Wall’ that forces countries to choose between technology systems.”
The precarious outlook would affect many nations caught in the crossfire of trade disputes, including struggling emerging markets with IMF programs, she added.
In calling for nations to work together to revise global trade rules and make them sustainable, she referenced frequent complaints about China’s trade practices, without specifically naming the nation.
“That means dealing with subsidies, as well as intellectual property rights and technology transfers,” she said, adding that a modernized trading system would unlock the potential of services and e-commerce.
Georgieva said one of the biggest risks was for governments to become complacent about trade disputes and take no action to resolve them or support growth.
“We are decelerating, we are not stopping, and it’s not that bad, and yet, unless we act now, we are risking a potential more massive slowdown,” Georgieva said.
If a synchronized slowdown in world economies worsens, she said, the world might need a “synchronized policy response” along the lines of stimulus efforts enacted during the 2008 to 2009 financial crisis.
Georgieva called for central banks to maintain low interest rates where appropriate, but warned that this could prompt excessive credit growth and risky investments in the search for better yields, leading to increased financial vulnerabilities.
“Our new analysis shows that if a major downturn occurs, corporate debt at risk of default would rise to US$19 trillion, or nearly 40 percent of the total debt in eight major economies,” she said. “This is above the levels seen during the financial crisis.”
She called on Germany, the Netherlands and South Korea to increase fiscal spending to support growth, but said that such spending was not appropriate for all nations since public debt remained near record levels.
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