World economy needs to avoid ‘self-inflicted wounds,’ IMF says

The U.S. economy is performing well but it’s not immune from external challenges that could affect its success, the acting managing director of the International Monetary Fund (IMF) told CNBC Tuesday.

“No matter how you cut it, the U.S. economy is doing well and it’s doing well at a time when global trade is very slow,” David Lipton told CNBC’s “Street Signs.” But he added that there “are many events in the world that could affect the U.S. economy and it makes sense to be vigilant to all of those.”

“We don’t have a recession in our baseline (scenario) but in light of the trade and technology tensions, in light of the financial markets, vulnerabilities are rising,” he added.

Lipton commented on the strength of the U.S. economy, noting how growth had lowered the unemployment rate to 3.7% without leading to inflation. But global trade remains a large concern for investors, business and organizations like the IMF which have highlighted the negative economic effect of barriers to trade.

U.S.- China trade tensions and the resulting tariffs have negatively affected consumers as well as many producers in both countries, the IMF’s top economists said in May, warning that an increase in duties would “significantly dent business and financial market sentiment, disrupt global supply chains, and jeopardize the projected recovery in global growth in 2019.”

The IMF also noted how the tariffs had done little to address the bilateral trade balance and that in 2018, in fact, the trade deficit increased for the U.S. as imports from China rose. In its last World Economic Outlook report in April, the IMF projected global growth to slow from 3.6% in 2018 to 3.3% in 2019, before returning to 3.6% in 2020. The Fund then predicted 6.3% growth for China in 2019 and 2.3% growth for the U.S.

Self-inflicted wounds
Concerns over global trade tensions have caused the spotlight to be once again focused on how central banks might stimulate the economy.

Lipton said that if a global recession occurred (although the IMF is not predicting one) then central banks and governments needed to be ready to react with the appropriate monetary and fiscal policy.

“It’s a time for the world to avoid causing a downturn — that means dealing with trade and technology tensions through dialogue so there are no self-inflicted wounds but being ready also to respond if the economy slows,” he said.

Lipton said he would not comment on any forthcoming central banking decision but attention is centered on the U.S. Federal Reserve’s monetary policy meeting and interest rate decision at the end of July.

Fed Chairman Jerome Powell signaled last week that the central bank could be poised to lower interest rates. The Fed has come under pressure from President Donald Trump to cut rates to stimulate growth after it began a process of policy normalization after years of quantitative easing (essentially, a massive injection of cash to stimulate the economy) after the financial crisis of 2008.

Lipton said that continuing accommodative policy — via low interest rates — and taking a data-driven approach to monetary policy was appropriate.

“We’ve been saying for some time that in light of the global circumstances that I just cited, and in the major three countries the U.S., Europe and Japan, that continued monetary accommodation is appropriate.”

He noted that “where some have argued that certain interest rate increases are needed, to create space later to ease, that doesn’t make sense. You don’t want to bring on the downturn that you fear might happen.”