IMF Chief Cautions World Economy May Face Major Challenges

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The head of the International Monetary Fund, Managing Director Christine Lagarde, rarely makes comments on the overall global economy. But because of her position at the helm of one of the world’s major economic organizations, her comments are closely followed. And her most recent forecast was particularly dim.

At a press conference, Lagarde cited challenges in the economic climate ahead. In particular she said, “The biggest and darkest cloud that we see is the deterioration in confidence that is prompted by [the] attempt to challenge the way in which trade has been conducted, in which relationships have been handled and the way in which multilateral organizations have been operating.”

It was a barely veiled reference to trade wars, such as those the U.S. has threatened to begin with trade adversaries like China as well as partners including the EU nations and Canada. The rhetoric has bee particularly ugly in the last few days. It is worth noting that few of the threats have turned into real actions–so far.

Lagarde is hardly the first person to make such an observation. The presumption among most economists is that trade wars will increase the price of goods and services. For example, President Donald Trump’s plan to add tariffs to imported cars could increase their prices by well more than 10%. Americans would either have to buy domestically built cars or pay a premium,. In the meantime, international car companies marketing vehicles to the U.S. would face falling sales due to the higher prices.

The global economy is already fragile, particularly among the most developed nations. GDP is expected to rise 2% to 2.5% this year and in the next. And EU nations are expected to do no better. Brexit could push the United Kingdom’s growth lower, and Japan’s growth could be weaker than 1%. China’s growth remains in the 6% to 7% range, but that is meager compared to most years of the last decade.

If Lagarde turns out to be right, many of the GDP numbers could be even worse.