The International Monetary Fund told the BBC that the global economy could shrink by the size of the French and German economies combined, if a large-scale trade war broke out between the world’s major economies.
This comes as fears grow ahead of Donald Trump’s possible re-election.
Trump says he plans to impose a global tax or tariff of up to 20% on all imports to the United States, while the European Union is already planning retaliation if Washington goes ahead with the new tax.
Last week, Trump said that “tariffs are the most beautiful word in the dictionary,” and global markets and finance ministers are now starting to take seriously the prospect of him enacting these ideas.
IMF Deputy Managing Director Gita Gopinath said the fund could not yet assess the details of Trump’s trade plans, but she believed that “if you have some very serious decoupling and widespread use of tariffs, you could end up losing global GDP by as much as Approximately 10% of global GDP. to 7%.
She continued: “These are very large numbers. 7% is a loss mainly for the French and German economies. This is the size of the loss that will be.”
Ms Gopinath also said that tariffs worth hundreds of billions of dollars were “very different from the world we have lived in for the last two or three decades”.
The IMF Vice President said that another of the Fund’s main messages at its annual meetings is to warn against ballooning levels of global government debt.
She said the current period of steady economic growth was “a moment to rebuild financial reserves” because “this will not be the last crisis.” There will be additional shocks. You will need the financial space to respond. Now is the right time to do it.”
Ms Gopinath said it was also necessary to “look on the bright side” of a resilient global economy after “some very tough hits”.
She pointed out that the global economy witnessed a smooth decline from multiple crises.
“Previous experiences with lowering inflation were not with a soft landing. They were large, significant increases in unemployment. This was a big hit, and it turned out to be much better than many had feared,” she said.
Gopinath added that it was a “good win” for central banks everywhere that inflation fell without unemployment rising. But this is the time to rebuild resilience in a fragile world.
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