IMF deputy head warns world to avoid global trade war

The International Monetary Fund (IMF) has told the BBC that a broad-based trade war between the world's major economies could shrink the global economy in the form of the combined French and German economies.

It comes as concerns are heightened ahead of Donald Trump's potential re-election.

Trump has said he plans to introduce a universal tax or tariff of up to 20% on all imports into the US, while the European Union is already planning to retaliate if Washington goes ahead with new tariffs.

Last week, Trump said “tariff is the nicest word in the dictionary”, and global markets and finance ministers are now beginning to take seriously the possibility of implementing his ideas.

IMF Deputy Managing Director Gita Gopinath said the fund has yet to make a definitive assessment of Trump's trade plan, but thinks that “if you have some very serious decoupling and extensive use of tariffs, you could face a loss to world GDP of up to 7%”.

“These are very big numbers, 7% basically losing the French and German economy. That's the size of the loss,” he continued.

Ms Gopinath also said the tariffs, worth hundreds of billions of dollars, were “very different from the world we've lived in for the past three decades”.

The IMF's deputy chief said another key message at the fund's annual meeting was to warn about ballooning levels of global government debt.

He said the current period of stable economic growth is “a moment to rebuild your fiscal buffers” because “this will not be the last crisis. There will be additional shocks. You will need fiscal space to respond. And now is the time to do it.”

Ms Gopinath said there was a need to “look on the bright side” with a resilient global economy after “some very tough shocks”.

He suggested that the global economy has seen a soft landing from multiple crises.

“The past experience of reducing inflation has not been a soft landing. It was a big, big unemployment increase. So it was a big hit, and it turned out much better than many feared”, he said.

Ms Gopinath added that inflation coming down without high unemployment was a “good win” for central banks everywhere. But it was now time to rebuild resilience in a fragile world.