IMF chief issues trade tensions warning
Policymakers should prepare for more market volatility amid further financial tightening and “choppy” waters in the global economy stemming from trade tensions, said Christine Lagarde, managing director of the International Monetary Fund.
The fund’s advice to central bankers and finance chiefs is to continue building monetary and fiscal buffers for the risks ahead, she said at the conclusion of the IMF and World Bank meetings in Bali, Indonesia.
“Now is not the time to say: ‘OK, fine, let’s just relax and do a bit of fiscal tolerance here and a slowing of reforms’,” Ms Lagarde said. On the trade disputes, she said “our message was very clear: de-escalate the tensions, and open and reform the dialogue”.
The Bali meetings have been dominated by talk of the twin risks of trade and monetary policy tightening, coming in a week in which global stock markets from the US to Asia were roiled as investors sought cover.
Officials including Bank of Japan governor Haruhiko Kuroda urged the US and China to restart talks around trade, while policymakers from emerging markets highlighted threats from Federal Reserve-led interest rate increases.
As for officials’ ability to deal with the next financial crisis, Ms Lagarde said there is “still, now, limited policy space” but that the banking system is “much stronger” with better supervision and regulations, fewer non-performing loans and “still sensible” leverage.
Flexible exchange rates are playing a “very good role as a shock absorber”, she said.
“There are risks out there in the system, of course, and we need to be mindful of that, and we need to make sure the buffers are rebuilt,” Ms Lagarde said. “It’s time to buckle up.”
Global finance chiefs used the closing sessions of talks in Bali to hammer home the message that simmering trade tensions are already denting global growth and need to be resolved.
The BoJ’s Mr Kuroda said it is essential to have dialogue on trade; Brazil’s central bank President Ilan Goldfajn flagged the tensions as one of the biggest threats to emerging economies; Bank for International Settlements general manager Agustin Carstens said there is a risk the global economy will go backwards due to rising protectionism.
People’s Bank of China governor Yi Gang called for a constructive solution to the dispute – and added that China is preparing for the worst.
“You see a lot of people in China now preparing for this trade tension to be a prolonged situation,” Mr Yi said. “The downside risks from trade tensions are significant.”
The Chinese official received support from the floor when Mexico’s former president Ernesto Zedillo took an opportunity during a question-and-an
There are risks out there of course, and we need to make sure the buffers are rebuilt. It’s time to buckle up CHRISTINE LAGARDE IMF managing director
swer session to counsel Mr Yi to follow the example set by Mexico and Canada during their Nafta negotiations with the US.
“Mexico and Canada made clear that they’d rather not have Nafta than having the deal that the US wanted. In the end, Mexico and Canada got their way in every single issue that had been drawn as a red line,” Mr Zedillo said. “So I hope China doesn’t blink.”
While the world expansion remains strong, the outlook is being clouded by “heightened trade tensions and ongoing geopolitical concerns, with tighter financial conditions particularly affecting many emerging market and developing countries”, said the International Monetary and Financial Committee, a 24-member panel that advises the fund on policy issues.
As officials left Bali, there was little prospect of any resolution to the US-China trade dispute in sight.
“We are moving from synchronised growth to economic divergence,” said Bank of France governor Francois Villeroy de Galhau.