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IMF: Trade resolution can only do so much to address 'synchronized slowdown'

Brian Cheung

The International Monetary Fund says the slowest pace of global growth since the crisis is partly due to trade standoffs, but warned that deeply rooted structural and geopolitical problems are also to blame.

The IMF’s projections for 2019 global GDP growth of 3% are a notch down from its most recent projection of 3.2% in July, and warned in its updated report that a continued tariff war between the U.S. and China would contract global growth by 0.8% through 2020.

The gloomy outlook comes as the U.S. and China work through a “phase one” trade deal that would delay U.S. tariff increases in exchange for a Chinese promise to increase agricultural purchases and abide by certain intellectual property-protection measures.

But IMF Managing Director Kristalina Georgieva says the phase one deal, as currently structured, would only restore about 0.2% of the currently-baked-in global GDP loss.

U.S. President Donald Trump and China's President Xi Jinping pose for a photo ahead of their bilateral meeting during the G20 leaders summit in Osaka, Japan, June 29, 2019. REUTERS/Kevin Lamarque
U.S. President Donald Trump and China's President Xi Jinping pose for a photo ahead of their bilateral meeting during the G20 leaders summit in Osaka, Japan, June 29, 2019. REUTERS/Kevin Lamarque

“That, of course, is good news but not good enough. What we need is to reach not just a truce but to have trade peace,” Georgieva told reporters at the IMF Annual Meeting Oct. 17. “We need to go back, no — we need to go forward, to a system that is enhanced and is enforced.”

The IMF also cautions that trade is only a short-term problem facing the global economy, noting that the entire world appears to be stuck in a “synchronized slowdown” owing itself to structural problems like low productivity and aging demographics — particularly in advanced economies.

Although the IMF projects global growth to rebound to 3.4% in 2020, the report notes that the improvement will likely be driven by emerging markets and not the major advanced economies. The IMF expects GDP growth to slow further in the U.S., China, and Japan in 2020.

Economists from the IMF are now urging countries to enact structural reform to fix these problems — before it’s too late.

Enacting fiscal policy

The IMF is urging governments to use fiscal policies to address specific problems in their economies. For example, the report encouraged Germany and the Netherlands to invest in social and infrastructure capital.

Gita Gopinath, the IMF’s chief economist, told Yahoo Finance that with central banks all over the world lowering borrowing rates, countries with budget surpluses should seize the opportunity to pass stimulative measures.

“For some countries that have the fiscal space, they need to undertake public investment spending and are able to borrow at negative rates, this seems like the perfect time to do it,” Gopinath said.

The IMF worries that monetary policy has its hands tied with rates so close to zero (and negative in Europe and Japan).

In a global slowdown, a lack of effective monetary or fiscal policy raises the question of whether countries will turn back to the IMF for austerity packages, a safety net designed to extend credit to countries in economic crisis but proven to have damaging socio-political effects. The latest episode: a $4.2 billion loan to Ecuador conditioned on the withdrawal of subsidies on fuel, sparking widespread protests.

The IMF’s message: Governments should get their house in order so that they don’t end up in an economic crunch to begin with. IMF advisor Romain Duval says well-timed and well-structured fiscal reforms, such as reducing barriers to entry for product markets, can boost output and revenue.

“Some of these reforms are actually going to reduce the need for any austerity,” Duval said.

Tobias Adrian, financial counsellor and director at the IMF, says regulatory policy is also key to preventing the next global crisis. Adrian recommended that governments activate a “countercyclical capital buffer,” a temporary increase on required bank capital to protect the financial services industry from macroeconomic shocks.

Adrian said lower interest rates have spurred risky corporate borrowing.

“We urge policymakers to act now to contain the deterioration of underwriting standards,” Adrian told Yahoo Finance in an interview.

Brian Cheung is a reporter covering the banking industry and the intersection of finance and policy for Yahoo Finance. You can follow him on Twitter @bcheungz.

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