Trade wars, debt: Biggest risks to world economy

A trade war and a new Cold War are threatening to rip apart the global economy. That’s the springtime message from the International Monetary Fund (IMF) and the World Bank.

Bankers and finance ministers from the IMF’s 189 member countries met in Washington, DC, on the 10th anniversary of the global financial crisis.

And although optimistic about economic growth over the next couple of years, the IMF warns that aging populations, lacklustre productivity, rising debt and the possibility of a global trade war could lead to a downturn.

“While the sun is shining, we are seeing more clouds accumulating on the horizon than we did back in October. Global debt is at an all-time high,” said Christine Lagarde, the IMF’s managing director.

According to the IMF, global debt came in at $164 trillion in 2016, an historic peak.

The IMF bails out failing economies and tries to create financial stability, while the World Bank lends to poor and middle-income countries.

Together, these two United Nations institutions aim to raise global living standards. But there’s danger ahead, even if the world economy is projected to grow by 3.6 percent in 2018.

Assessing the IMF’s report card, it provided a “fairly positive picture,” says Gregor Irwin, chief economist at Global Counsel. “Global prospects are good, one or two clouds on the horizon, concerns about protectionism, concerns about financial vulnerabilities in China.”

They [the US and China] are not in a trade war yet, but there’s a risk of a trade war … it would be fair to describe US policy as unpredictable and also quite aggressive.

Gregor Irwin, chief economist, Global Counsel

Irwin believes China’s rising debt, as well as a looming trade war between China and the US, could pose a threat to the global economy.

“Growth prospects remain good in China, nobody’s expecting a major slowdown tomorrow in Chinese growth, but the big concern about China is that debt to GDP is still rising. It’s projected to rise further still, and it’s very high by the standards of other countries or by historical standards, and frankly, it looks unsustainable. So that is a genuine concern over the next few years over the stability of the global economy.”

Irwin says that the US and China “are not in a trade war yet, but there’s a risk of a trade war. One of the concerns about a trade war is it wouldn’t just involve the US and China, but it would inevitably drag in other countries as well and they’d be caught up in the crossfire between the US and China. Right now, I think it would be fair to describe US policy as unpredictable and also quite aggressive. Equally, I think when you look at China’s policy stands – also what the Europeans might do if there are any measures targeting China, I think we can expect to see retaliation, and that’s where the trade war scenario really begins to potentially become a real one.”