The global economy is experiencing a “synchronized slowdown,” the new head of the International Monetary Fund said on Tuesday, warning that it would worsen if governments failed to resolve trade conflicts and support growth.
In a blunt inaugural speech since taking the helm of the global crisis lender on Oct. 1, IMF Managing Director Kristalina Georgieva said 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 conflicts could mean a $700 billion reduction in global gross domestic product (GDP) output by 2020, or around 0.8%, she said, previewing new Fund research to be unveiled during IMF and World Bank annual meetings next week.
“In this scenario, the whole economy of Switzerland disappears,” Georgieva added.
The research takes into account U.S. President Donald Trump’s announced and planned tariff increases on remaining Chinese imports, or around $300 billion worth of goods. Much of the GDP losses will come from a decline of 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 U.S.-China trade war got started, when countries representing nearly 75% of the world’s output were seeing accelerating growth, she said.
The Bulgarian economist, a former European Union official who previously held the No. 2 job at the World Bank Group, said 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, a ‘digital Berlin Wall’ that forces countries to choose between technology systems.’”
The precarious outlook will affect many countries caught in the crossfire of trade conflicts, including struggling emerging markets with IMF programs, she added.
In calling for countries to work together to revise global trade rules to make them sustainable, she referenced frequent complaints about China’s trade practices, without specifically naming the country.
“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.
Risk of complacency
Georgieva said one of the biggest risks was for governments to become complacent about trade conflicts 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 may need a “synchronized policy response” along the lines of stimulus efforts enacted during the 2008-2009 financial crisis.
Georgieva called for central banks around the world to maintain low 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 $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 such spending was not appropriate for all countries since public debt remained near record levels.