The head of the International Monetary Fund has warned that the majority of countries around the world can expect slower growth in 2019 as the global economy loses momentum.
Christine Lagarde said rising trade tensions, concerns over Brexit and tougher financial conditions as central banks raised interest rates had “increasingly unsettled” the world economy over recent months.
In a speech in Washington on Tuesday before the IMF’s spring meeting next week, Lagarde indicated that the global lender of last resort was likely to downgrade its forecast for world growth in 2019 and 2020.
In January, the IMF said it expected that the world economy would expand by about 3.5% in both 2019 and 2020. But Lagarde said: “It has since lost further momentum, as you will see from our updated forecast next week.”
The warning from the Washington-based fund comes as fears grow over the strength of the world economy a decade on from the 2008 financial crisis, triggered by growing risks from the US-China trade dispute and higher interest rates.
Lagarde said the IMF expected economic growth to slow in 70% of countries this year, two years after a synchronised upswing for three-quarters of countries in 2017.
“A year ago, I said: ‘The sun is shining – fix the roof.’ Six months ago, I pointed to clouds of risk on the horizon. Today, the weather is increasingly unsettled,” she said.
Despite the warning, Lagarde said the global economy should be able to steer clear of a full-blown recession in the near term. “In fact, we expect some pickup in growth in the second half of 2019 and into 2020,” she said.
Financial markets were rattled last year by the increase of interest rates by the US Federal Reserve and Donald Trump’s trade dispute with Beijing. Signs in recent months of central banks, including the Fed, holding back from additional rate rises have calmed global markets.
The rebound for growth pencilled in by the IMF for the second half of 2019 did, however, come against a backdrop of increasingly “precarious” conditions, Lagarde said, with potential risks including Brexit, high debt in some sectors and countries, tensions over trade policy and a sense of unease in financial markets.
“Many economies are not resilient enough. High public debt and low interest rates have left limited room to act when the next downturn comes, which inevitably it will,” she said.
Fears over the health of the global economy have increased in recent weeks. Turkey lurched back into a period of financial markets turmoil last week and figures from the eurozone showed that German manufacturing output dropped last month at the fastest pace since 2012.
Economists said the disappointing readings from Germany probably reflected the slower pace of Chinese economic growth. Chinese car sales fell for the first time in almost 30 years last year in a blow to several German car manufacturers who count on the country as their biggest export market. Germany only narrowly managed to avoid recession last year, while Italy is in recession.
The weaker outlook for growth comes amid a slowdown in global trade as Donald Trump imposes 10% tariffs on $200bn of Chinese imports to the US, with threats to extend the use of the border taxes on China and other countries.
The president has threatened to impose 25% tariffs on all Chinese imports if the two countries cannot resolve their disputes in negotiations. The Chinese vice premier, Liu He, is due in Washington for another round of talks starting on Wednesday.
Lagarde said the IMF had modelled the potential impact of tariffs on all goods sold between the US and China being raised by 25 percentage points. US figures show the total value of US-China trade in goods was almost $660bn (£506.5bn) last year.
She said such an increase would reduce annual GDP by up to 0.6% in the US and by up to 1.5% in China. “These are potentially self-inflicted wounds that should be avoided,” she said. “Nobody wins a trade war.”
