Lagarde: We see risk on the horizon, and the horizon is getting closer

The International Monetary Fund earlier this week downwardly revised its global growth outlook for the second time in three months. But IMF Managing Director Christine Lagarde said that even the dimmer outlook still reflects a relatively strong world economy.

“We look at the half-full and the half-empty, and we try to be completely cold and honest about it. We revised down by 0.2%. So in October we said global growth will be 3.7 [percent], now we say 3.5,” Lagarde said in an interview with Yahoo Finance at the World Economic Forum in Davos, Switzerland. “It’s not a major, major revision. It’s a rather modest one, and we still have quite decent growth.”

The IMF in its most recent World Economic Outlook report added it sees 3.6% growth for 2020, down 0.1 percentage points from its previous estimate in October. According to IMF data, global GDP growth averaged 3.48% between 1980 and 2017, a hair below the institution’s most recent projection of 3.5% for 2019.

“3.5 [percent] is nothing to be shy about or ashamed of, it’s pretty good,” Lagarde said.

Risks on the horizon

However, Lagarde remains cautiously optimistic as a host of international concerns continue to mount. The IMF’s latest report noted that added snags have arisen since its last October release, including in Germany in light of new automobile fuel emission standards, in Italy where sovereign and financial risks have dampened domestic demand, and in Turkey where financial market sentiment has contracted more than anticipated.

“Where I look at the half empty glass is that we see risk, risks, on the horizon. And the horizon is getting closer to us,” Lagarde added.

The three major risks now are around Brexit, U.S.-China trade tensions and the current high levels of public and private debt, Lagarde said.

“Those risks start with the like of here in Europe, Brexit, how will it pan out? When? What will be the transition period, what will be the divorce and future collaboration terms? Big question mark,” Lagarde said. “Second one, trade friction, tension, war, whatever you call it. How will it be resolved, what tariff will be reduced or increased? Which sectors will be affected?

And then you look at the financing costs that will apply as economies actually come out of the big financial crisis, that will apply to countries to corporate and to households that have considerably increased their debt level relative to their activity,” Lagarde added. “Those are the three critical factors that we see.”

Although “these risks are coming closer to us” relative to October, Lagarde noted that there is, in fact, more hope now on the U.S.-China trade front especially.

“Back in October, there was not that sort of step-by-step dialogue that we are seeing in place gradually between the U.S. and China,” Lagarde said. Trump and China’s President Xi Jinping agreed in December to halt additional tariffs through March 1 as the two sides work toward negotiating a trade resolution. A delegation from the U.S. held three days of meetings with Chinese officials in Beijing earlier this month.

Working collaboratively on trade is one suggestion Lagarde raised for helping construct a platform for future global growth.

Aside from the resolving trade tensions, another “is the whole area of standard-setting when it comes to the digital developments that we are seeing,” Lagarde said. “I don’t think that anybody is keen to have a global economy that would be split into three, or two different zones if that was the case, where data rules are different, where technological standards are going to take us apart rather than more together.”

Ultimately, “it’s fairly natural that an economy actually wants to grow,” Lagarde said. “What I think is the big issue at the moment is under what terms and conditions, and on an international basis, how even-handed, how respectful is this attempt to grow and to expand.”

Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck

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