Global Growth to Slow Amid Trade War, But Recession Unlikely, IMF Head Says

By Paul HannonThe global economy will grow more slowly as a result of the tariffs imposed by U.S. President Trump and counter measures taken by other countries, but it will avoid a recession, the head of the International Monetary Fund said Thursday.In a speech ahead of a twice-yearly meeting of the Fund's government membership, Kristalina Georgieva added that a breakdown of trust sparked this "reboot of the global trading system," which could be remedied if the U.S. cuts its budget deficit, China embraces a more services-centered economy and the European Union invests more while removing internal barriers to competition.IMF economists will next week publish updated expectations for the global economy. In January, they forecast that output would increase by 3.3% this year, a slight acceleration from 2024. That upgrade was largely due to an increase in projected U.S. growth.However, those forecasts were put together before Trump launched a barrage of tariff hikes and pauses that left few parts of the world economy untouched."Our new growth projections will include notable markdowns, but not recession," said Georgieva. "We will also see markups to the inflation forecasts for some countries."The World Trade Organization Wednesday lowered its forecast for global economic growth this year to 2.2% from 2.8% to account for the impact of higher tariffs.However, the Fund's managing director warned that the economic impact of higher tariffs could be greater if they undermine the stability of the global financial system.She noted that yields on longer-maturity U.S. government bonds have risen while those on shorter-dated debt have fallen, a combination that suggests concern about the economic outlook in both the immediate and distant future."We see how, despite elevated uncertainty, the dollar depreciated, and U.S. Treasury yield curves "smiled"--it is not the sort of smile one wants to see," she said. "Such movements should be taken as a warning."Federal Reserve Chair Jerome Powell said Wednesday that policymakers will try to ensure any one-time increases in prices from tariffs don't fuel more persistent hikes. That suggests the Fed is set to hold back from lowering interest rates, even as it acknowledges that unemployment will likely pick up as a result of tariffs in the short run.In a post on Truth Social, Trump Thursday urged the Fed to lower its key interest rate, and said Powell's "termination cannot come fast enough" following comments that he described as "a complete mess."Georgieva said central bankers must remain free to make decisions without coming under political pressure."To protect price stability, monetary policy must remain agile and credible, supported by a strong commitment to central bank independence, " she said. "Central bankers must keep an eagle eye on the data--including higher inflation expectations in some cases."Georgieva avoided criticism of the Trump administration, and instead presented the trade conflicts as the inevitable result of flaws in the economic system created by decades of globalization."Trade tensions are like a pot that was bubbling for a long time and is now boiling over," she said. "To a large extent, what we see is the result of an erosion of trust--trust in the international system, and trust between countries."Georgieva said trust can be repaired if large economies are prepared to take the steps needed to rebalance, which the Fund has long urged.The IMF called on China to boost "chronically low" domestic consumption, including "steps to dial back industrial policies and pervasive state involvement in industry." That would increase Chinese imports and cool exports.On the other side, it said the U.S. should "put federal government debt on a declining path" by cutting the budget deficit, which would lower demand for imports. In Europe, the IMF welcomed a turn in Germany towards higher government spending, which should boost demand for imports and reduce the economy's reliance on exports as a driver of growth."In trade policy, the goal must be to secure a settlement among the largest players that preserves openness and delivers a more level playing field--to restart a global trend toward lower tariff rates while also reducing nontariff barriers and distortions," Georgieva said.Write to Paul Hannon at [email protected]