IMF’s Lagarde says US-China dispute may slash 2020 global growth

International Monetary Fund’s managing director sees uncertainty caused by trade wars as the main economic threat.

Christine Lagarde
IMF Managing Director Lagarde tells Reuters trade wars may slow global economic growth next year but the world is unlikely to fall into a recession [File: Eric Piermont/AFP]

The International Monetary Fund does not see the threat of a global recession brought on by a widening United States-China trade war and potential US tariffs on Mexican goods and cars, IMF Managing Director Christine Lagarde has said.

However, in an interview to the Reuters news agency on Wednesday, Lagarde said such escalating tariff threats were sapping business and market confidence, and could slow growth that is currently expected to improve next year.

“We don’t see a recession,” Lagarde said when asked whether US President Donald Trump‘s threatened tariff actions could turn global growth negative. “Decelerating growth, but growth nonetheless – 3.3 percent at the end of this year, and certainly a strong US economy. We do not see at the moment, in our baseline, a recession.”

Earlier on Wednesday, the IMF said current and threatened US-China tariffs could cut 2020 global gross domestic product (GDP) by 0.5 percent, or about $455bn – a loss larger than G20 member South Africa’s annual economic output.

The estimate includes a recent US tariff increase to 25 percent on a $200bn list of Chinese imports as well as Trump’s threat to tax another $300bn worth of consumer imports, representing nearly all trade between the world’s two largest economies.

Mexico tariffs

The IMF’s estimate does not include Trump’s threatened five percent tariffs on goods from Mexico starting on Monday over immigration issues and ratcheting up monthly. Mexico has overtaken China this year as the largest US trading partner.

Mexican President Andres Manuel Lopez Obrador has received an official list of US products that could be subject to retaliatory tariffs if across-the-board duties threatened by the Trump administration take effect, officials told Reuters.

Trump has pledged to apply the first round of tariffs on all Mexican imports starting next week if Lopez Obrador’s government does not stem the flow of mostly Central American migrants seeking entry into the US via Mexico.

Mexico's President Andres Manuel Lopez Obrador greets supporters during an official event at the port of Dos Bocas in Paraiso
Mexico’s President Lopez Obrador is reportedly considering retaliatory tariffs against the US if President Trump imposes punitive levies [Reuters]

Lagarde called such actions “self-inflicted wounds” that must be avoided, a message she will take to a meeting of G20 finance ministers and central bank governors in Fukuoka, Japan, this weekend.

“One more tariff here, one more threat there, one more negotiation that has not yet started, add to a global uncertainty which is not conducive to additional growth,” she told Reuters.

In a briefing note for G20 finance leaders, the IMF said that US tariffs and Chinese retaliatory measures currently in place could cut 2020 output by 0.3 percent, with more than half of that impact coming from negative effects on business confidence and financial market sentiment.

On Wednesday, the IMF also cut its China growth forecasts for 2019 and 2020 due to the growing trade tensions. It is due to release preliminary findings of its annual assessment of the US economy on Thursday.

The IMF is predicting 3.6 percent global growth for 2020, but said this outlook is vulnerable to trade tensions, uncertainty over Britain’s exit from the European Union, and uncertain recoveries in some stressed economies such as Argentina and Turkey.

Fighting with facts

Asked whether the IMF needed to take a tougher stance against US tariff actions, Lagarde said the Fund had to keep presenting facts and economic research to tell leaders: “If you go in that direction, these are the consequences. It’s for political leaders and for policymakers to decide what is in their interest.”

Lagarde said she would discuss the IMF review of its quotas and other financial resources with G20 policymakers in Fukuoka this weekend.

While the US is opposed to increasing the Fund’s quotas, or voting shares, Lagarde said she has had good dialogues with US Treasury Secretary Steven Mnuchin about the need to maintain the IMF’s total lending war chest of about $1 trillion.

“Having gone through the crisis 10 years ago and knowing the power of the fire powder that you can commit, I think it’s critically important to give a signal that the capacity to commit $1 trillion today if there is a multiple-country crisis should actually be preserved,” Lagarde said, adding she was confident that the IMF will find ways to maintain its crisis lending fund by an October deadline.

Source: Reuters