Trade war to weaken global growth and increase inflation, IMF warns

The world economy is expected to grow slower this year and experience higher inflation than previously anticipated, according to new forecasts to be released by the International Monetary Fund that will show the global fallout of the US trade war.

The growth projections, to be released early next week, will offer the clearest indication to date of the damage that President Donald Trump's economic policies are having on global output. Since taking office in January, Trump has imposed a wide range of tariffs on most of America's trading partners, while ratcheting levies even higher on imports from China, Canada and Mexico.

"Our new growth projections will include notable markdowns, but not recession," Kristalina Georgieva, the IMF managing director, said Thursday in a speech before the spring meetings of the IMF and the World Bank. "We will also see markups to the inflation forecasts for some countries."

Georgieva's comments added to a growing chorus of top economic officials, including the heads of the Federal Reserve and the World Bank, who have sounded alarms this week about the potential harm Trump's policies could cause.

The European Central Bank on Thursday lowered interest rates, saying that "the outlook for growth has deteriorated owing to rising trade tensions." Central bankers, finance ministers and other policymakers will gather in Washington next week as they continue to grapple with how to respond.

Georgieva was careful in her criticism of the Trump administration's policies, which have created widespread uncertainty for businesses and are disrupting international supply chains. But she made clear her concerns about the costs of protectionism.

"Ultimately, trade is like water," Georgieva said. "When countries put up obstacles in the form of tariff and nontariff barriers, the flow diverts."

She added: "Some sectors in some countries may be flooded by cheap imports; others may see shortages. Trade goes on, but disruptions incur costs."

Georgieva's speech came as organizations such as the IMF and the World Bank are facing fresh questions about their viability, in part because of new skepticism from the United States about the value of international financial institutions. As the world's largest economy, the United States plays a leading role in steering the direction of the IMF and the World Bank, but some of their initiatives on climate change and other policy matters are at odds with the Trump administration's priorities.

In her remarks, Georgieva acknowledged that jobs losses associated with earlier decades of liberalized trade and globalization had created a sense of unfairness in some places, fueling the concerns about national security and self-reliance that have led to a resurgence of protectionism. She argued that such policies, however, were taking a toll on smaller economies and emerging markets, raising prices around the world and dampening productivity.

"In trade policy, the goal must be to secure a settlement among the largest players that preserves openness and delivers a more level playing field -- to restart a global trend toward lower tariff rates while also reducing nontariff barriers and distortions," Georgieva said.

Jerome Powell, the chair of the Federal Reserve, said Wednesday that the US central bank was similarly weighing how to navigate a situation where Trump's tariffs could lead to slower growth and higher inflation.

"We may find ourselves in the challenging scenario in which our dual-mandate goals are in tension," Powell said at the Economic Club of Chicago. "If that were to occur, we would consider how far the economy is from each goal, and the potentially different time horizons over which those respective gaps would be anticipated to close."

On Thursday morning, Trump lashed out at Powell, saying the Fed chair was wrong to not be lowering interest rates in the United States. He added that Powell's "termination cannot come fast enough!"

Slower global growth is expected to take a particularly tough toll on developing countries, which have been slow to emerge from the pandemic. Their troubles are compounded by the fact that they now face a pullback of foreign aid from the United States.

Ajay Banga, the president of the World Bank, this week urged developing countries to lower their trade barriers to avoid higher U.S. tariffs and to maintain their own regional trade relationships as the international commerce system comes under pressure. He also noted that he expected global growth to be weaker than previously projections this year.

"Countries need to care about negotiating and dialogue," Banga told reporters Wednesday. "It's going to be really important in this phase, and the quicker we do it, the better that will be."