The head of the International Monetary Fund warned Thursday that the healthiest global economy in years is threatened by rising debt levels, volatile financial markets and a simmering trade dispute between the world's two biggest economies.
IMF Managing Director Christine Lagarde told reporters a US-China trade war "will not be something that will affect only the two countries because the world is so interconnected. It will affect the global economy."
"Investment and trade are two key engines that are finally picking up. We don't want to damage that," she said at a press briefing to open the spring meetings of the IMF and World Bank.
For now, the IMF expects the global economy to grow 3.9 percent this year, the fastest since 2011. But Lagarde says "we are seeing more clouds accumulating on the horizon." She cited trade tensions and rising global debts, which have hit a record US$164 trillion. She noted that government debt in advanced economies is at the highest level since World War II.
Lagarde's comments came at a press conference to open the spring meetings of the 189-nation IMF and its sister lending organisation, the World Bank.
The three days of talks will also include discussions among the Group of 20 major economies, which account for more than 80 percent of global economic output. The United States is being represented by Treasury Secretary Steven Mnuchin and Federal Reserve Chairman Jerome Powell.
Finance officials from member governments this week during the Washington meetings – which end Saturday – will discuss the trade disputes that Lagarde said threatened to cause damage beyond the two countries involved, due to the interconnected nature of global supply chains.
While she acknowledged "the actual impact of growth is not very substantial when you measure in terms of GDP," she said the dispute could erode business confidence very quickly because of the uncertainty, which would make businesses "reluctant to invest."
International cooperation "has served us so well and delivered more progress for more people than at any time in history," but is now being questioned, Lagarde said.
The spring meetings are occurring as the global economy enjoys a broad-based rebound — with most regions recording growth — for the first time since the 2008 financial crisis sent the world into a deep recession.
But Lagarde said the expansion was vulnerable. Stock prices are unusually high but have been battered recently over growing concerns about US President Donald Trump's aggressive America First trade policies. The turbulence comes as the Federal Reserve ratchets up US interest rates from the record low levels where they had been in the decade after the financial crisis.
While the Fed has been raising rates at a gradual pace, Lagarde expressed concern about the consequences if the Fed had to accelerate the pace of its rate hikes. A rapid succession of rate hikes could push down stock prices and potentially hurt developing countries that have come to rely on foreign investment, she said.
To guard against these risks, Lagarde called for countries to take advantage of the current good times to reduce their debt, giving them room to ramp to combat a downturn.
While she welcomed bilateral discussions between Washington and Beijing, she said disagreements should be resolved in a multilateral forum and every country should address its own trade barriers. Lagarde again urged countries to "steer clear of all protectionism," saying that "unilateral trade restrictions have not proven helpful." Instead, "countries should work together to resolve disagreements without using exceptional measures."
Even with the implied critique of Trump's tactics, Lagarde praised the massive US corporate tax reform which the Fund "advocated, recommended, encouraged, and is very pleased to see happening."
Lagarde did not directly criticise Trump's hardball trade policies. But she urged countries not to abandon seven decades of international cooperation that she credited with "helping to reduce poverty and deliver more progress for more people than at any time in history."