Kristalina Georgieva, in her first major address as head of the International Monetary Fund, painted a downbeat picture of the world economy and said a more severe slowdown could require governments to coordinate fiscal-stimulus measures.
In a speech that sets the tone for next week's annual meeting of the IMF, Georgieva said the fund will cut its growth forecast for both 2019 and 2020 in its next World Economic Outlook due October 15. In July, the fund lowered its projection to 3.2 per cent this year and 3.5 per cent next year - its fourth downgrade since last October.
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Global institutions, economists and investors are blaming the US-China tariff conflict as a prime factor for slowing global growth. The trade tensions have partly caused manufacturing to tumble and weakened investment, creating a "serious risk" of spillover to other areas of the economy like services and consumption, Georgieva said in prepared remarks in Washington on Tuesday. Global trade growth is close to a standstill, she added.
"The global economy is now in a synchronized slowdown," she said, noting that the fund estimates that 90 per cent of the world is seeing slower growth. By contrast, two years ago, growth was accelerating across three-quarters of the globe in a synchronized upswing, she added.
"Uncertainty - driven by trade but also by Brexit, and geopolitical tensions - is holding back economic potential," Georgieva said. Not only that, but the economic rifts could "last a generation" with possible shifts such as broken supply changes and siloed trade.
The Organisation for Economic Cooperation and Development trimmed its forecast last month, while World Bank President David Malpass said Monday that the lender is preparing to downgrade its assessment from a projection of 2.6 per cent it made in June.
A deeper slowdown would require more fiscal support, Georgieva said. "If the global economy slows more sharply than expected, a coordinated fiscal response may be needed," she said. "We are not there" but it's better to be too early with it than late.
On monetary policy, Georgieva said central banks should keep interest rates low where appropriate, "especially since inflation is still subdued in many countries and overall growth is weakening." She warned, however, that very low or even negative interest rates can come with "negative side effects and unintended consequences" that can lead to financial vulnerabilities.
"Monetary and financial policies cannot do the job alone. Fiscal policy must play a central role," she said.
Georgieva, former chief executive officer of the World Bank, took over on Oct. 1 as IMF managing director, succeeding Christine Lagarde, who left to lead the European Central Bank.