The head of the International Monetary Fund said Wednesday that after six years of disappointing growth, the world economy is finally gaining momentum. But she warned of potential threats, from political uncertainty in Europe to protectionism that could hinder trade.
Christine Lagarde, the IMF’s managing director, said there is a critical need for more international cooperation. Restricting trade flows would be a “self-inflicted wound” that would harm workers and consumers, she said in a speech previewing next week’s meetings in Washington of the 189-nation IMF and its sister lending organisation, the World Bank.
In the speech in Brussels, Lagarde did not single out any country for criticism on the issue of protectionism. In his campaign, President Donald Trump had vowed to impose punitive tariffs on goods from countries that he thinks harm American workers by flouting trade rules.
Trump has threatened to slap tariffs as high as 45 percent on goods from China and Mexico unless those nations stop practices that he says violate trade laws.
Resorting to protectionism, Lagarde said, would disrupt supply chains for domestic companies and inflate prices that companies and consumers must pay. A better approach would be for countries — both those with trade surpluses and those with deficits — to cooperate in pursuing policies to address the imbalances.
“Cooperation means working together to ensure that countries observe a level playing field,” Lagarde said.
The Geneva-based World Trade Organisation released a report Wednesday predicting that global trade will rebound this year and in 2018 after a lacklustre 2016. The WTO estimated that trade flows would increase 2.4 percent this year, up from 1.3 percent in 2016, which was the weakest figure since the height of the financial crisis in 2008.
Next week’s finance meetings will likely be dominated by debate over how the global financial system should respond to trade and other economic proposals being pushed by the new Trump administration. The United States will be represented at the discussions by Treasury Secretary Steven Mnuchin and Federal Reserve Chair Janet Yellen.
In an interview with Bloomberg television, Lagarde cautioned against any move by the United States to target China as a currency manipulator in a report scheduled to be released in coming days by the Trump administration. She spoke in response to a question about the possibility that the administration could label China a manipulator, something Trump had pledged to do during the campaign but which most analysts say he is unlikely to do now.
Lagarde said a better approach would be to conduct currency assessments in a “cohesive manner.” She noted that the IMF plans to issue a report on exchange rates in July.
In her speech, Lagarde said next week’s meetings will occur at a time when prospects for the global economy are improving after struggling for six years to emerge from the severe downturn triggered by the worst financial crisis since the 1930s.
“After six years of disappointing growth, the world economy is gaining momentum as a cyclical recovery holds out the promise of more jobs, higher incomes and greater prosperity going forward,” Lagarde said in her appearance at Bruegel, an economic research institute in Brussels.
She pointed to stronger manufacturing activity in advanced economies and robust gains in emerging economies, which she said will provide more than three-fourths of expected global growth in 2017.
One of the reasons for optimism is a rebound in the price of commodities which have brought relief to many low-income countries.
“Putting all this together, we see a global economy that has a spring in its step,” Lagarde said, while cautioning that downside risks remain.
She said that in addition to the threat to trade from rising protectionism and political uncertainty in Europe, persistently sluggish growth in productivity — the amount of output per hour of work — remains a problem for the global economy.
Lagarde said that if productivity had grown since 2008 as it had been before the financial crisis, economic output in advanced economies would be 5 percent higher today — the equivalent of adding a country with output larger than Germany to the global economy.
Lagarde said that nations must find ways to reinvigorate productivity, such as investing more in education and infrastructure and providing tax incentives to foster research and development.