Why IMF chief says the world has avoided a ‘tit-for-tat slide into trade war’

The head of the International Monetary Fund said the global economy showed resilience to an initial wave of trade disruptions, but she warned against complacency because financial markets and growth can sour quickly without prudent policies.

Speaking ahead of the IMF and World Bank’s annual meetings next week in Washington, Managing Director Kristalina Georgieva said that “all signs point to a world economy that has generally withstood acute strains from multiple shocks.”

Forecasts for recessions earlier this year haven’t proven true, she said, and global growth will slow slightly in 2025 and 2026. Many economies have performed “better than feared, but worse than we need,” she added.

“The world has avoided a tit-for-tat slide into trade war—so far,” Georgieva said in the text of a speech in the US capital. “But openness has nonetheless taken a big hit.”

With China “decelerating steadily,” medium-term growth rates are now about 3% compared with 3.7% before the Covid-19 pandemic.

On tariffs, she added her voice to those who say the economic impact from President Donald Trump’s policies will take more time to play out: “The full effect is still to unfold.”

Washington Meeting

The IMF is scheduled to release new forecasts in its World Economic Outlook next week, when finance minsters and central bankers will gather to assess a global economic environment buffeted by shocks ranging from US import taxes to Chinese overcapacity.

The stewards of economic and monetary policies will meet at a time when the price of gold — traditionally a haven asset during periods of turbulence — smashed through $4,000 an ounce amid concern about the US economy. A government shutdown in Washington added fresh momentum to the scorching bullion rally.

The demand for gold is a sign that “global resilience has not yet been fully tested,” Georgieva said, pointing out that holdings of monetary gold now exceed one-fifth of the world’s official reserves.

She also had words of caution about “easy financial conditions,” without specifying any particular market or country.

US equity indexes have hit records this month, fueled by a boom in artificial intelligence and technology company shares.

“Today’s valuations are heading toward levels we saw during the bullishness about the internet 25 years ago,” she said. “If a sharp correction were to occur, tighter financial conditions could drag down world growth, expose vulnerabilities, and make life especially tough for developing countries.”

Easy financial conditions “are masking but not arresting some softening trends, including in job creation,” Georgieva said.

‘Single-Market Czar’

She also offered some advice for the world’s leading economic engines — the US, China and the European Union.

The Bulgarian native called on Europe to consider appointing a “single market czar” to drive necessary reforms in the region in order to lift competitiveness and “catch up with the private sector dynamism of the US.”

China needs a “fiscal-structural package” to boost private consumption, Georgieva said. The world’s No. 2 economy also needs to “transition to a new growth model, and reflate its economy,” which will “also help counter the recent depreciation of its real exchange rate, which pulls against rebalancing.”

The US, she said, needs to address the federal budget deficit with measures including “sustained action that goes beyond discretionary spending” and incentivize household savings with policies such as expanding the favorable tax treatment for retirement savings.

Do Rosario writes for Bloomberg.