The global economy has “lost further momentum” since January, said IMF Managing Director Christine Lagarde on Tuesday. “This is a delicate moment that requires us to ‘handle with care.’ This means that we must not only avoid policy missteps, but also be sure to take the right policy steps.”
Lagarde said growth has been slowing largely because of trade tensions and financial tightening last year. But she went on to say that the U.S. Federal Reserve has reversed course in a way that will “benefit” the world economy. The Fed no longer plans any interest rate increases this year, and it is ending its asset reduction, which Trump and Wall Street wanted. That leaves Trump’s tariffs and Brexit as the major factors weighing on the world economy, the IMF said.
In new research released Wednesday, the IMF found that if the United States and China raise tariffs by 25 percent on all goods traded between the two countries, the U.S. economy would lose between 0.3 and 0.6 percent and the Chinese economy would lose between 0.5 and 1.5 percent.
Focusing on bilateral trade deficits, as Trump has done with China, is useless because erecting trade barriers against one country such as China typically results in the United States importing more from other nations, the report concludes.
The largest driver of the U.S. trade deficit from 1995 to 2015 was macroeconomic factors such as the fact that the United States was spending more than it was producing, the IMF found.
The IMF predicts the U.S. trade deficit will widen even further because of “recent fiscal stimulus” from Trump’s tax cuts and the uptick in government spending. Last year was the largest U.S. trade deficit for goods in the nation’s history.
Trump has repeatedly said he is using tariffs as a negotiating tool to get China to agree to stop stealing U.S. intellectual property and stop subsidizing so many industries. Chinese subsidies likely played a role in the U.S.-China trade deficit as well, the IMF found.
“Most countries do some subsidizing, but the issue [with China] is more the extent of it and how widespread it is,” said economist Florence Jaumotte, lead author of the IMF study on trade.
Top Chinese officials are in the United States this week for further trade talks, although it’s unclear if the two countries will be able to come to an agreement.
There are signs that trade is weighing on business sentiment. About 85 percent of chief financial officers said they expect a U.S. downturn by the end of 2020, according to a quarterly survey of more than 150 CFOs by consulting firm Deloitte.
“Those expecting a downturn were most likely to cite U.S. trade policy, business and credit cycles, and the impacts of slowing growth in China and Europe on the U.S. economy,” Deloitte said in its report released Wednesday.
Trump has put hefty tariffs on nearly 15 percent of all U.S. imports. While global leaders are urging Trump and Chinese President Xi Jinping to reach a deal and for the removal of U.S. tariffs on steel and aluminum, most still say they are not expecting a recession. Only 15 percent of the CFOs say a recession will hit by 2020. The IMF had a similar message this week.
“To be clear, we do not see a recession in the near term. In fact, we expect some pickup in growth in the second half of 2019 and into 2020,” Lagarde said.
That pickup is largely expected to come from more stimulus from the Chinese government to help that country rebound and resolution of Trump’s tariffs and Brexit. The IMF will release its latest growth projections for the U.S., Chinese and global economies next week.