The global economy is slowing and leading to protectionism at a time when companies are dependent on widely dispersed supply chains.
Christine Lagarde, the Managing Director of the International Monetary Fund, chooses her words carefully. There’s no other way for her.
The IMF bails out countries that are deep in debt, it coordinates with central banks to ensure the international financial system runs smoothly, and keeps a watch over the economic outlook of 189 member countries.
On Sunday, Lagarde warned governments to be prepared for a possible “storm” that might undermine the world’s economic output.
“When there are too many clouds, it takes one lightning (strike) to start the storm,” she said at a summit in Dubai.
This doesn’t bode well for companies, which might face difficulties in finding buyers for their products and services. It could have an impact on wages, and in a worst-case scenario, lead to job losses.
Lagarde said the four reasons driving the IMF’s negative outlook include the US-China trade war, rising interest rates, uncertainty around Brexit, and a slowdown in the Chinese economy.
When titans clash
Last month, the IMF revised down its projection for global economic growth for 2019 to 3.5 percent from the 3.7 percent it estimated only three months earlier.
The United States and China are embroiled in a trade war and both countries have imposed tariffs on imports of each other’s goods.
Tariffs could hinder the flow of goods and disrupt complex supply chains where components from multiple countries are assembled in China.
While until last year the effects of the trade war were only being felt by specific industries hit directly by tariffs, the impact has now spilt over into financial markets in advanced economies, the IMF says.
Chinese and American officials are negotiating to find a way to settle the dispute and have until March 1, the deadline when Washington is set to raise tariffs on $200 billion worth of Chinese goods.
The two sides are up against a difficult challenge as the US wants China to stop the practice of forcing foreign companies to share their technology and subsidising Chinese firms. But these structural reforms could require years to implement.
The German dilemma
While its neighbours in Europe have suffered from rising government debt and fiscal deficits in the last few years, Germany has remained relatively immune.
With its diverse manufacturing base that produced world-class cars and home appliances, the country was able to sail through the 2008 financial crisis.
But late last year it’s economy slowed and narrowly avoided a recession. Part of that was because of slowing exports to China.
A German slowdown can lead to problems elsewhere in Europe. Many German companies rely on parts and components from neighbouring states.
The official response to this problem has been similar to what the US and China are promoting — government support for their own firms.
In order to preserve its lead as a major manufacturer, Germany plans to introduce measures to protect its technology companies from foreign takeovers.
Germany’s economic minister, Peter Altmaier, introduced a controversial plan earlier this month that seeks to promote “national and European champions” to counter China and the US.
Cheap money no more
Economic stimuli like low-interest rates introduced after the financial crisis ten years ago have come to an end. And now that central banks are tightening monetary policies, it can have a domino effect on the production of goods and services.
The US hiked interest rates four times last year and the European Central Bank has announced an end to its policy to boost spending.
Emerging markets like Turkey and Argentina have also tightened their belt to contain debt and current account deficits.
An interest rate increase in a big economy like the US means investors would be more inclined to put their money there than bet on investments in a developing country, something that might add to the concerns about global economic growth.