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IMF's Lagarde laments 'wasted opportunity' from trade war

Managing director hints at possible downgrade to global growth forecast

International Monetary Fund Managing Director Christine Lagarde speaks to Nikkei in Tokyo on Oct.4. (Photo by Arisa Moriyama)

TOKYO -- The Sino-American trade war represents "such a wasted opportunity" at a time of transformation in global trade and manufacturing, said Christine Lagarde, managing director of the International Monetary Fund, in a Thursday interview with Nikkei.

The economy is changing as a result of a "massive increase of services" and "significant" breakthroughs in terms of combined technologies, artificial intelligence, biotech and robotics, Lagarde said. "All of that is changing" the way we produce and trade, she added.

She argued that the smart way to "improve our economies and increase growth would actually be to lower barriers rather than to raise tariffs."

If the trade war escalates and retaliation continues, the impact will hit not only China itself, but also neighboring countries that share supply chains with it, Lagarde warned. The U.S. -- mainly consumers -- would suffer a blow as well, she said.

The IMF chief hinted that the body could downgrade its global growth forecast in its semiannual world economic outlook due out next week. The organization now projects 3.9% growth this year and in 2019.

The global economy continues to grow "quite steadily," she said, but warned of more risks than six months ago.

With the U.S. and other developed nations raising interest rates, Lagarde expressed concern about the risk of capital flight from emerging markets that had previously seen inflows. Countries must "steer the boat," she said -- determine policies, implement them and drive forward rather than simply "drift."

"Our recommendation to many countries around the world is build your buffers," she said. "Make sure that you create the fiscal space and the monetary space in order to be able to resist if and when there is a shock." Bracing for turbulence is likely to be on the agenda at next week's meeting of Group of 20 finance ministers and central bankers in Bali.

Lagarde was in Japan for an Article IV consultation, one of the IMF's periodic surveys of countries' financial and economic developments.

In its concluding statement dated Thursday, the IMF supported Japanese plans to raise the 8% consumption tax to 10% in October 2019. But it warned that "carefully designed" mitigating measures are needed to alleviate the impact on consumer spending, particularly on such durable consumption as autos and housing.

"The effect of the tax increase is expected to carry past 2019 and adversely affect consumption and overall growth in 2020," the statement said.

The IMF said the government's current fiscal consolidation framework "lacks a long-term plan to address the increases in social security expenditures and ensure debt sustainability." It recommended gradually lifting the consumption tax to 15% to raise necessary revenue, as well as maintaining a single flat rate, rather than lowering taxes on some items to ease the burden on consumers.

Lagarde told Nikkei that the IMF supports the Bank of Japan's monetary policy, though side effects are a concern. "The banks, particularly regional institutions, are certainly squeezed," which will likely push them to seek higher yields, she said.

The IMF's statement also lauded the policy adjustments the central bank announced in July to make easing more sustainable, while offering a few recommendations, including clarifying the relationship between newly added forward guidance on long-term rates and the inflation target.

"Moreover, to strengthen policy credibility, the BOJ should consider moving closer to a full-fledged inflation targeting framework by publishing BOJ's staff baseline forecast together with underlying policy assumptions," it said.

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