The postwar global trading system risks being torn apart, the International Monetary Fund has warned, amid concern over the tariff showdown between the US and China.
In a sign of its growing concern that protectionism is being stimulated by voter scepticism, the IMF used its half-yearly health check for the world economy to tell policymakers they needed to address the public’s concerns before a better-than-expected period of growth came to an end.
Maurice Obstfeld, the IMF’s economic counsellor, said: “The first shots in a potential trade war have now been fired.”
He said the conflict could get worse if Donald Trump’s tax cuts sucked imports into the US and led to a bigger trade deficit. “The multilateral rules-based trade system that evolved after world war two and that nurtured unprecedented growth in the world economy needs strengthening. Instead, it is in danger of being torn apart.”
Obstfeld added: “The renewed popularity of nationalistic policies is another after-effect of the financial crisis and its prolonged aftermath.”
Increasing inequality and poor prospects for living standards had fuelled a widespread backlash against politics, he said.
“If policymakers are complacent and do not tackle the challenge of strengthening long-term growth, political risks could intensify, possibly reversing some of the progress that economic reforms and integration have achieved to date.”
His warning came as the IMF’s World Economic Outlook predicted the growth in 2018 and 2019 would be the strongest and broadest-based since 2010, when there was an initial sharp bounce back from the global recession of 2008-09. The fund said it expected expansion of 3.9% this year and next – up by 0.2 point in each year from the October WEO.
Obstfeld said this output acceleration was being helped by faster growth in the eurozone, Japan, China and the US, all of which grew above expectations last year, along with some recovery in commodity exporters.
The WEO said its biggest growth upgrade had been for the US, which is expected to expand by 2.9% in 2018 and 2.7% in 2019 – up from the 2.3% and 1.9% predicted in October. The eurozone is also expected to outperform previous forecasts, with growth of 2.4% in 2018 and 2.0% in 2019, up by 0.5 point and 0.3 point respectively.
The IMF made only modest changes to its forecasts for the UK. It said growth was on course to be 0.1 point higher in 2018, at 1.6%, but 0.1 point lower in 2019, at 1.5%.
Despite the UK’s muted growth prospects, the IMF gave its blessing to interest rate increases from the Bank of England, noting that unemployment was close to record lows and further falls could add to wage pressures at a time when inflation was already above the government’s 2% target.
The IMF said strong growth would help dispel some of the remaining legacies of the financial crisis of a decade ago, by accelerating the end to unconventional monetary policies such as quantitative easing, boosting investment and healing labour market scars.
“Other after-effects of the crisis seem more durable, however, including higher debt levels worldwide and widespread public scepticism about policymakers’ capacity and willingness to generate robust and inclusive growth,” Obstfeld said.
He added that there was a risk that interest rates might need to rise more quickly than expected in the US because tax cuts had come at a time when the economy was close to full employment.
The IMF said the world economy might do better than expected in the immediate future but that after the next few quarters there were more downside than upside risks. These included a sharp tightening of financial conditions, waning public support for globalisation, growing trade tensions and geopolitical strains.