Move aside, inflation — the IMF is worried about tariffs

The International Monetary Fund (IMF) — the DC-based 191-nation body that pumps out data, writes cheques, and wrangles governments to work together on economic issues — just dropped its latest six-monthly World Economic Outlook. And it coincides with the Fund’s fall meetings in DC, drawing ministers, central bankers, and gurus from all corners.

Now, it’s a hefty 174-paged tome, and you’ve got a lot going on (those episodes of Love is Blind aren’t going to binge themselves), so here are some of the top themes brewing: 

1. Recession avoided, inflation tamed

Let’s start with the good news, shall we? According to the IMF, the global economy has proven surprisingly adaptable, outmanoeuvring Covid-19, supply chain shocks, and interest rate hikes that nearly tipped us into the abyss.

And we’re not just dialling up the drama here. Remember 2022? Bloomberg’s economists were forecasting a 100% chance of a US recession, and IMF head Kristalina Georgieva was warning that a third of the world would enter a recession in 2023.

By this year, however, the IMF had changed its tune, warning instead that growth just looked “tepid”. Then fast forward to this week, and the IMF’s head of research Pierre-Olivier Gourinchas is now cheerily telling reporters that recession worries have nearly evaporated, while the world should hit the common 2% inflation target in 2025.

Now of course, it’s not all beer and lollipops: some central banks are still worried about inflation (eg in Turkey), and inflation in services (like communications and health) is still almost double pre-pandemic levels. 

But still, Monsieur Gourinchas says “the battle against inflation is almost done”. Ask him about global growth, however, and the smile fades ever-so-slightly, because…

2. Growth remains stable but meh

The global growth situation is a real Whitman’s Sampler right now:

• In the world’s largest economy (the US 🇺🇸), growth is still humming along at 2.8%, up from the 2.6% forecast in July and faster than any other G7 member
• In the world’s second-largest economy (China 🇨🇳), growth continues to cool from 5.2% last year to 4.8% this year — that’s still solid by world standards, but below the Communist Party’s 5% target
• In the eurozone 🇪🇺, economies are now limping along with 0.8% growth, though that’s somehow still much faster than last year
• And over in India 🇮🇳? They’re still retaining the title as the world’s fastest growing major economy right now, with a cool 7% growth .

So while the IMF describes the collective picture as “underwhelming”, there’s a decent argument you could maybe bump that assessment up to “whelming”.

3. Protectionism is up

But just as you’re declaring victory over inflation, and patting yourself on the back for some solid whelming, the IMF has another warning in store: tariffs. Specifically, the Fund is warning that if tariffs hit a “sizeable swath” of global trade, growth could quickly evaporate.

The big question is really between the US and China, the world’s top two trading nations, which together make up almost half the global economy. And ~300 hours out from election day in the US, both candidates clearly see a critical role for tariffs:

• Harris is vowing to continue “targeted” tariffs on China, while Trump is calling for much higher tariffs on China, plus a 10-20% tax on all other US imports.

Now, the IMF warns that “an intensification of protectionist policies would exacerbate trade tensions, reduce market efficiency, and further disrupt supply chains.” But (as we explore below) it doesn’t say much about the problem both candidates say they’re trying to address: what they describe as China’s unfair trading practices.

Either way, as wars persist and China and the US teeter towards a trade war, Gourinchas is not only forecasting slower global growth next year, but he’s warning that economies retreating inward could ultimately leave us more vulnerable to…

4. “A world dominated by supply shocks, from climate, health and geopolitical tensions”

While we’re all used to tracking economic developments by referring to prices in a basket of goods or assets in a portfolio, we’re now having to track, say, changes in the climate, Putin’s next move, mind-bending developments in tech, and pirates attacking ships.

Gourinchas notes this all makes the job of economic policy-making harder. We’d add it also makes the role of international institutions like the IMF more critical.

INTRIGUE’S TAKE

Zooming out a little beyond all the data and one-liners, what’s really going on with our global economy right now? Carnegie’s Michael Pettis gave an interesting answer earlier this year — it’s a lot to condense here, but he’s basically arguing our vast global trade imbalances (particularly between China and the US) are distorting what should be the benefits of free trade for everyone.

So what’s the solution? Many of the available options for a rebalance simply aren’t politically or economically sustainable. So against that backdrop, Pettis argues that economies like the US either need to a) fix the global trading system, or b) essentially opt out, ideally with as many friends as possible. After years of struggling with option a), the US is now arguably shifting more towards option b).

This latest IMF report warns of the consequences of that shift, but it doesn’t have too much to say about what’s driving it, beyond noting that China’s measures to date still aren’t enough.

Also worth noting:

• BRICS leaders happen to be meeting in Russia this very same week. Interestingly, two of the group’s newest members, Egypt and Ethiopia, still turned to the IMF for loans this year, rather than the beleaguered BRICS Bank.
• Separately, the IMF just warned that world government debt is about to break past the $100T mark.