The world economy is headed for a soft landing, inflation is going down, and rate cuts are coming, according to Kristalina Georgieva, International Monetary Fund managing director, but she says the rise of trade restrictions, including tariffs, from the world’s largest economies is the “most worrisome” risk to global growth.
“Trade is slowing down even more than it would be slowing down otherwise,” Georgieva said during an interview with CNBC “Squawk on the Street” co-anchor Sara Eisen at the CNBC CEO Council Summit in Washington, D.C., on Tuesday.
The IMF has tracked a tripling of trade restrictions over the last year, from 1,000 to 3,000, and the IMF managing director said two-thirds of those tariffs lack justification. “The most worrisome thing is we see an embracement of industrial policy willy-nilly everywhere,” she said.
By everywhere, Georgieva meant mostly the three largest economic powers in the world: the U.S., China and the European Union. “Half of the industrial policy measures come from these places and when we analyze [the tariffs] … we can find justification for one-third,” she said.
The IMF managing director tried to strike a balance between understanding the need for greater trade restrictions while also calling for more thoughtful approaches to tariffs.
“We have to accept there are some reasons why this love for tariffs has reappeared,” Georgieva said. “Globalization didn’t really work for everybody.”
She also noted that the Russia-Ukraine war taught many countries about the importance of supply chain security and the need to diversify supply sources.
As the two major party candidates for the U.S. presidency, President Biden and Donald Trump, both pursue aggressive tariff policies, Georgieva said the changes in trade patterns already are leading to slower growth than the IMF would otherwise expect. “I remember the many times industrial policy becomes ‘favorable’ and then super-disappointing, for the simple reason governments are not good at choosing companies that are going to be the winners,” she said.
IMF calculations indicate that trade restrictions can cost the global economy between as little as 0.2% growth in a best-case scenario, to up to 7% of GDP in a worst case. “Taking 7% out of the world means Japan and Germany are gone,” Georgieva said. She added that when a country implements a trade restriction, the probability of reciprocity is 75%, ratcheting up her concerns about the law of unintended consequences. “We are appealing for carefully calibrated actions that meet needs of national security and economic security, but don’t throw the baby out with the bath water. The question is how far we take the logic.”
In the short-term, things look good, with the IMF recently upgrading its growth outlook to 3.2%. The recent performance of the global economy has outperformed expectations, as well, led by the U.S., with global GDP gaining 6.7% over the past two years — almost a full percentage point higher than the IMF forecast back in 2022.
Georgieva said her concern is centered on the medium-term growth prospects, which she said “are quite disappointing.”
The IMF projects roughly 3% global growth annually in the years ahead, which she noted is almost 1% less than before Covid. “This slow growth means people will be disappointed, families worry about financial futures. Unless we get growth up, productivity up, we will have people on the streets,” she said.
The divergence between advanced countries and emerging economies that benefitted from globalization may increase, with poor countries falling further behind for first time in the past three decades, she said. “Small open countries beg us to bring some common sense into the decision making.”
Over the past 30 years, the world economy tripled, while emerging markets in developing economies quadrupled. “We’re better off protecting a degree of integration that works for everybody. … Push costs up, what do you think is gonna happen to prices? They go up!” Georgieva said. And when “poverty is up, and hunger is up, ultimately it affects global security.”
