The global economy is experiencing a "synchronised slowdown," the new head of the International Monetary Fund (IMF) said on Tuesday October 8th, Reuters has reported.
In a hard-hitting and direct inaugural speech, 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.
Warning that the slowdown would worsen if governments failed to resolve trade conflicts and to support growth, she said that 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%.
"In this scenario, the whole economy of Switzerland disappears," Georgieva added.
During her speech, she previewed new IMF research, which takes into account
President Trump's 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% of the world. The global economy is now in a synchronised slowdown. This means that growth this year will fall to its lowest rate since the beginning of the decade," Georgieva said.
The situation today is in stark contrast to two years ago, before the US-China trade war started, when countries representing nearly 75% of the world's output were seeing accelerating growth, she said.
She warned that disruptions 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 will affect many countries caught in the crossfire of trade conflicts, including struggling emerging markets with IMF programmes, she added.
In calling for countries to work together to revise global trade rules to make them sustainable, Georgieva 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 modernised 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 conflicts and take no action to resolve them or to 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 potentially more massive slowdown," Georgieva said.
The Bulgarian economist, the former Number Two at the World Bank, called for central banks around the world 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 $19 trillion, or nearly 40% of the total debt in eight major economies," she said. "This is above the levels seen during the financial crisis."
She urged 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.