Lagarde Warns of Emerging Market and Low-Income Shocks by Trade War With China

via Mish

IMF chief Christine Lagarde warns of emerging market and low-income shocks if Trump escalates his trade war with China.

The intensifying trade war between China and the United States could “shock” emerging markets that are already in danger, the head of the International Monetary Fund said in an interview published Tuesday.

As a result, crises in Turkey and Argentina could spread, IMF Managing Director Christine Lagarde told the Financial Times.

If the world’s largest two economies continue on this course, it could have a “measurable impact on growth in China” and could “trigger vulnerabilities” in neighboring Asian economies whose supply chains are closely linked to Chinese industry, Lagarde told the newspaper.

Some emerging economies find themselves in precarious situations, with currencies weakening in part due to the strong US dollar and investors looking instead to the United States, where benchmark lending rates are steadily rising. Weakening emerging market currencies could also affect eurozone exporters such as Germany and Spain.

Earlier in the year, Lagarde had already warned against the dangers of a global trade war, hammering the argument that trade in goods and services was a driver of global growth.

Also consider the Financial Times report Lagarde Warns of US-China Trade War ‘Shock’ to Emerging Markets.

Lagarde noted the adverse impact in the US would mostly be felt by the “low-income people within the consumer population” who would be hit by higher prices on a wide range of goods.

It usually pays to fade Lagarde and the IMF, especially on growth estimates. In this case, she is correct to be concerned about emerging markets. She also stated it could affect EU exporters.

Her warning should have gone further. The entire global economy will be impacted by a major US trade war with China.

Lagarde is correct in that low-income families would get the hardest. But no one will win. Some will simply lose more than others.

“Trade is a positive, trade is a plus, trade needs fixing certainly,” said Lagarde.

Actually, the only “fix” needed is complete free trade.

Alan Greenspan Comparison

Alan Greenspan was another economist it usually paid to fade. However, Greenspan was consistently right on one facet of policy. During his entire economic career, Greenspan was unwavering in his support of free trade.

Expect Contagion

The notion that the US will decouple from the global economy now is as silly as the notion that China would decouple in 2008.


So what do I think? Well, I believe the S&P 500 EPS growth has peaked and the debt-fueled tax cuts have been entirely passed through. Global growth is slowing and the US-China trade war is nearing a period where global growth will get a shock. China is 20% of world trade and that will roll into the US with a slowdown; I think showing up in the 1H19 and a mild recession in late 2019 or 2020. US equities are in for a repricing event as well, and it could start as soon as the end of this year. We are positioned for a -30% decline in S&P 500 for March 2019.