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Concerns have been raised by high-ranking officials regarding a significant shift towards economic protectionism, which they believe could disrupt the global economic recovery. This warning comes as the United States presidential election approaches its concluding phase. During the annual meetings of the International Monetary Fund (IMF) and the World Bank in Washington, officials expressed relief at indicators suggesting the global economy is heading towards a soft landing, managing to avoid a recession following a severe inflationary period.
Nevertheless, these officials cautioned that growing political risks in the United States and elsewhere might negatively impact the economic outlook. Agustín Carstens, the general manager of the Bank for International Settlements, told the Financial Times that any new efforts to reverse globalization and revert to protectionism would be worrying. Such actions could result in increased prices, higher unemployment, and constrained growth.
Klaas Knot, head of the Dutch central bank and chair of the Financial Stability Board, warned of potential “price corrections” in certain markets, citing the disparity between rising geopolitical risks and current valuations. Some policymakers express concern that the global, rules-based order represented by institutions like Bretton Woods, celebrating their 80th anniversary this year, is at risk of disruption.
With Donald Trump and Kamala Harris closely matched in the polls, a significant policy shift in the United States could occur next year. Trump has proposed imposing broad tariffs of 20% on U.S. trading partners, a 60% tax on Chinese imports, mass deportations of undocumented immigrants, and extensive tax cuts.
The IMF has attempted to quantify the impact of a trade war involving tariffs by the U.S., Europe, and China. It estimates the global economy will grow by 3.2% this year and the next, but extensive levies, tax breaks, reduced migration, and higher borrowing costs could decrease output by 0.8% in 2025 and an additional 1.3% in 2026. Economists at Morgan Stanley anticipate Trump’s tariff strategy would reduce real GDP growth in the United States by 1.4%, while increasing consumer prices by 0.9%.
Yale University’s Budget Lab predicts a similar impact on growth and a more substantial increase in prices, estimating that Trump’s trade measures could cost households up to $7,600. Combining these tariffs with mass deportations, Mahmood Pradhan from Amundi Asset Management warns the situation could worsen, describing it as akin to stagflation, marked by negative growth and declining real wages due to increased everyday goods’ prices.
Despite optimism at the annual meetings regarding inflation control after significant disruptions, concerns persist. Price pressures are nearly mitigated, and central banks are entering initial phases of their easing cycles, considering how swiftly interest rates can be lowered to stimulate growth without hindering the job market. Kristalina Georgieva, the head of the IMF, highlighted the importance of successfully tackling inflation and noted the global economy risks being trapped in a low-growth, high-debt phase.
Global public debt is projected to surpass $100 trillion by year-end, potentially approaching 100% of global GDP by decade’s end, according to multilateral lenders. Some attendees fear financial markets have not fully recognized these daunting debt levels’ impact. Mahmood Pradhan warned that increased debt levels could lead to volatility in the U.S. Treasury market, a significant bond market, and a potential decline in foreign investors’ strong interest in this safe haven.
Policymakers were particularly concerned on Friday about the possibility of long-standing relationships turning adversarial as they prepared to leave Washington. Paschal Donohoe, the president of the Eurogroup, stated that this scenario presents challenges for Europe due to its trade intensity and could also affect the U.S. by impacting consumer prices. He emphasized the potential to create significant uncertainty and, consequently, reduce the ability to achieve a soft landing.