One of the International Monetary Fund’s top officials warned on Tuesday that storm clouds were gathering over the global economy and that governments and central banks might not be well-equipped to cope.
The Fund had been urging governments to “fix the roof” during a sunny last two years for the world economy, IMF First Deputy Managing Director David Lipton said.
“But like many of you, I see storm clouds building, and fear the work on crisis prevention is incomplete,” he said at a banking conference hosted by Bloomberg.
He also warned that strains could leave policymakers under pressure and in uncharted waters.
“Central banks would likely end up exploring ever-more unconventional measures. But with their effectiveness uncertain, we ought to be concerned about the potency of monetary policy.”
Many governments won’t have much room for manoeuvre, either, having already racked up high debts.
“We should not expect governments to end up with the ample space to respond to a downturn that they had 10 years ago,” Lipton said. Stimulus may also be a hard sell politically, considering the financial burden it creates, he said.
The biggest immediate risk, though, is the current trade war between the United States and China. If all of the threatened tariffs are put in place, as much as three-quarters of a percent of global GDP would be lost by 2020, the IMF has estimated.
“That would be a self-inflicted wound. So it is vital that this ceasefire (recently announced between Washington and Beijing) leads to a durable agreement that avoids an intensification or spread of tensions.”
If it doesn’t and a stalemate sets in, there could be a damaging “fragmentation” of the global economy that causes a downturn, he said.