Is the alarmist tone around the trade war overblown?

The global economy is expected to lose just 0.5 percentage points of growth compared to the IMF’s January projections, according to the latest World Economic Outlook from the International Monetary Fund. This, despite an unprecedented trade war. BNR's in-house economist, Han de Jong, is questioning whether the IMF’s numbers add up. We called Thijs Knaap, chief economist at APG, to discuss.

According to De Jong, there are a few possible explanations for the surprisingly mild figures: either the IMF’s projections are accurate and the trade war panic is overblown, or the models are flawed, or perhaps—out of diplomatic caution—the IMF is deliberately avoiding overly negative forecasts. Does he have a point?
“The IMF’s World Economic Outlook is like a timetable for where the global economy is headed. These projections, published every spring and fall, are always slightly adjusted from previous forecasts. The media jump on these changes, reporting that growth expectations have been revised up or down. In that sense, Han de Jong is right to raise the issue. He’s pointing out that, despite the trade war dominating headlines, the spring forecasts show only a minor adjustment compared to projections made before Trump took office. But that doesn’t mean the forecasts are wrong or that the IMF is too timid to publish the real figures.”

So what’s really going on?
“My take is that the IMF does have an explanation—but no one’s hearing it. Models like those used by the IMF are great at showing how an economic shock can be absorbed and how the economy can eventually return to its previous growth path. It’s like a car crash test: the IMF can explain in detail what happens during and after the crash—but not predict the crash itself. An economy is a swirling mass of millions of people and businesses making decisions, and it’s impossible to fully anticipate all their effects.”

But the IMF does offer an explanation?
“Yes. In addition to the team that puts together the World Economic Outlook, there’s another group that, on the same day, publishes the Global Financial Stability Report. That press conference gets far less attention. But what does their spring report say? That risks to financial stability have increased significantly. Financial institutions like banks may come under stress, and in a worst-case scenario, government bonds could face a sell-off. If that happens, even Trump might be forced to change course. So on one hand, we have IMF forecasters downplaying the economic impact of the trade war, and on the other, the risk analysts warning we’re heading into dangerous territory.”

Why does no one seem to hear that warning?
“The problem with a risk department is that it always focuses on potential dangers. But if you issue too many warnings, people stop listening when the real crisis hits. And yet the Global Financial Stability Report contains serious warnings and recommendations. For example, it stresses the importance of cooperation between governments, regulators, and central banks to keep global trade flowing. Think back to the 2008 financial crisis, when governments had to rescue several banks to prevent a total collapse of the financial system. The IMF is now urging policymakers and regulators to be ready to act if needed. But with Trump upending everything, I’m a bit concerned about whether that willingness to cooperate still exists. For instance, the White House has questioned whether the U.S. Federal Reserve should continue providing dollar liquidity to European banks. That’s a dangerous idea—it’s like removing the fire extinguishers while smoke is already on the horizon. So in that sense, Han de Jong is right: the IMF might be a bit too polite to shout fire, but it has identified the risks. The good news is that if the economy does go off the rails, the IMF’s “timetable” shows what needs to be done to get it back on track. For now, we’re in the calm before the storm, and it’s difficult to navigate based solely on the World Economic Outlook’s forecasts.”