The International Monetary Fund (IMF) sees severe downside risks for the global economy arising from trade tensions, debt accumulation and uncertain financial conditions.

It estimates that increased US-China tariffs, taking into account recent actions and announcements as well as those implemented last year, could reduce the level of global GDP by 0.5% in 2020 or about US$455bil.

This, managing director Christine Lagarde said, could make a huge dent in economic activity.

While the global economy is showing tentative signs of stabilisation, she said the risks remained.

Moving forward, Lagarde said policy makers needed to make the most out of the policy tools available to protect growth.

“Determined joint action is of the essence, especially on trade, corporate taxation, financial regulation reforms, climate change, and demographic shifts,” she said.

On the issue of rising debt, Lagarde told StarBiz that the burden of public debt was a growing problem globally.

Global debt – public and private – hit an all-time high of about US$184
trillion in nominal terms, the equivalent of 225% of GDP, in 2017.

Lagarde said private sector debt has tripled since 1950, making it the driving force behind global debt.

“Global public debt, on the other hand, has experienced a reversal of sorts.

“After a steady decline up to the mid-1970s, public debt has gone up since, with advanced economies at the helm and, of late, followed by emerging and low-income developing countries,” she said.

In terms of policies, Lagarde said feasible and growth-friendly fiscal consolidation should be made a priority for countries where public debt is on a sustained upward trajectory.

Countries, she said, should strengthen efforts to mobilise domestic
revenues and only consider new borrowing for investment projects with credibly high rates of return.

To support member countries in dealing with debt issues, Lagarde said the IMF was working with the World Bank on a multi-pronged approach focused on improving public debt sustainability analysis, enhancing debt data transparency, scaling up capacity on debt management, and reviewing debt policies.

Asked about the current low interest rate environment, Lagarde noted that major central banks had rightly slowed the pace of monetary policy normalisation of late.

However, she said continued accommodative monetary policies lead to the accumulation of debt in advanced economies, while emerging markets remain vulnerable to sudden shifts in financial conditions.
“Financial sector policy can help limit risks, including by encouraging stronger balance sheets, but all this is happening at a moment when monetary and fiscal policy space appears more limited than in the past, leaving little room to respond to unexpected downturns,” she said.

As far as policies were concerned, Lagarde said action was needed on a number of fronts.

First, monetary policy needs to be data dependent, and in many countries, should stay accommodative given the still-low inflation.
Second, she said, fiscal policy needs to balance trade-offs between protecting the recovery, debt sustainability, and social objectives.
“And third, structural reforms should lay the foundation for stronger, more inclusive growth,” she said.