IMF Managing Director Christine Lagarde said the IMF modestly cut its global growth forecast for 2019 to 3.5 percent from 3.7 percent. Speaking at the World Economic Forum in Davos, Switzerland, on Tuesday, she said the move was due to the high level of economic risks that are accelerating around the globe. These include the U.S.-China trade war, Brexit and China's slowing economy.
"Six months ago these were threats, but they were not at the level of magnitude we have now," Lagarde told CNBC. Now we are seeing the ripple effects these issues are having on the global economy, she said. Among them: tariff increases that are shaking up markets and boosting volatility particularly in advanced economies. "There is a compounding effect to all this. Market values have changed dramatically over the last few months," she points out.
Right now there is uncertainty over when these risks will be resolved, Lagarde said. Take Brexit, for example. No one knows if the U.K.'s withdrawal from the European Union will be resolved by the March 11 deadline or if it will be a no-deal exit. Last week Parliament overwhelmingly rejected British Prime Minister Theresa May's proposal for a deal. "This is a big uncertainty for Europe, and the role played by London as a key financial center," she said.
On the trade front, the IMF chief noted there has been progress. The new U.S.-Mexico-Canada Agreement has been resolved, and the TPP 11 (Trans-Pacific Partnership agreement) has been ratified by seven members and is now in place. "These are all positives, but you still have the big elephant in the room: the U.S. and China that have to resolve trade disputes over issues of intellectual property, state-owned entities, subsidies and the balance of trade."
We don't know how long it will take to resolve the issues in a satisfactory way between both countries.
Trade negotiations between the United States and China have been ongoing for months, ever since both countries have started slapping billions of dollars of tariffs on a variety of goods. They have set a March 2 deadline in their cease-fire for imposition of a new round of tariffs.
The trade war has an impact on how these large economies are growing. China on Monday announced that its official economic growth came in at 6.6 percent in 2018 — the slowest pace since 1990. Fourth-quarter GDP growth was 6.4 percent, a sign the economy is decelerating.
So what is her advice for policymakers? "Focus on the issues and how to resolve them. Address remaining vulnerabilities, and be ready if a serious slowdown were to materialize."
"At this point, country policymakers need to harness the existing growth momentum in order to create more policy room to act."