International Monetary Fund (IMF) Managing Director Kristalina Georgieva speaks at the ISO 20121 Greening Ceremony during the IMF-World Bank Group Spring Meetings at IMF Headquarters in Washington, DC on April 15, 2024.
Mandel Ngan | AFP | Getty Images
The global economy is heading for a soft landing, with inflation falling and interest rate cuts on the way, according to International Monetary Fund (IMF) Managing Director Kristalina Georgieva, but she said the “most worrying” risk to global growth was increased trade restrictions, including tariffs, by the world’s largest economies.
“Trade is slowing down more than it should have been slowing down,” Georgieva said in an interview with CNBC’s “Squawk on the Street” co-anchor Sarah Eisen at the CNBC CEO Summit in Washington, DC, on Tuesday.
The IMF has tracked a three-fold increase in trade restrictions over the past year, from 1,000 to 3,000, but the IMF managing director said two-thirds of these tariffs lack justification. “What worries me most is the way industrial policies are being adopted indiscriminately everywhere,” she said.
By “everywhere,” Georgieva was referring primarily to the world’s largest economies: the United States, China and the European Union. “Half of the industrial policy measures come from these countries. [the tariffs] “…I can see justification for a third of it,” she said.
The IMF Managing Director sought to strike a balance between understanding the need for stronger trade restrictions while calling for a more thoughtful approach to tariffs.
“We must admit that there is a reason for the resurgence of the love for tariffs,” Georgieva said. “Globalization has not actually worked for everyone.”
She also noted that the war between Russia and Ukraine has taught many countries the importance of supply chain security and the need to diversify sources of supplies.
With both major US presidential candidates, President Biden and Donald Trump, pushing aggressive tariff policies, Georgieva said changing trade patterns are already leading to slower growth than the IMF had expected. “I remember many times when industrial policies looked ‘favorable’ but then turned out to be very disappointing, for the simple reason that governments are bad at picking winners,” Georgieva said.
According to IMF calculations, trade restrictions could cost the global economy just 0.2% growth slowdown in the best case scenario, and a 7% drop in GDP in the worst case scenario. “A loss of 7% from the world would mean the disappearance of Japan and Germany,” Georgieva said. She added that there is a 75% chance of reciprocity when countries implement trade restrictions, reinforcing concerns about the law of unintended consequences. “We want carefully calibrated actions that meet our national security and economic security needs, but without losing what we hold dear. The question is how far we should pursue that logic.”
In the near term, things are looking good: the IMF recently raised its growth forecast to 3.2%. Recent developments in the global economy have also been better than expected, led by the United States, with global GDP growing 6.7% over the past two years, almost a percentage point above the IMF’s forecast for 2022.
Georgieva said concerns focused on the medium-term growth outlook, which she called “very disappointing.”
The IMF projects global economic growth at about 3% per year over the next few years, nearly 1% lower than before COVID-19, she noted. “This slower growth means people are becoming disheartened and families are worried about their economic future. If we don’t increase growth and productivity, people will take to the streets,” she said.
The gap between developed countries and emerging economies that have benefited from globalization is likely to widen, with poorer countries falling further behind for the first time in three decades, she said. “Small, open countries are asking us to bring common sense to their decision-making.”
Over the past 30 years, the global economy has tripled and developing emerging markets have quadrupled. “It’s better to maintain a level of integration that benefits everyone. If costs go up, what do you think will happen to prices? They’ll only go up!” Georgieva said. “If poverty and hunger increase, that will ultimately affect global security.”
