In remarks ahead of this weekend’s meeting of Group of 20 finance ministers in Argentina, Lagarde said there were signs global growth could begin to decline and called on policymakers to prepare.
The International Monetary Fund on Monday called the increasing trade restrictions “the greatest near-term threat” to the world economy.
Through 2019, the IMF estimated the world economy should grow by 3.9 percent but “this may be the high-water mark,” Lagarde said in a blog post.
“Already growth is beginning to slow in the Euro Area, Japan, and the United Kingdom,” she said, adding that recent US fiscal stimulus would soon wane.
IMF economists prepared a report for the G20 ministers with simulations showing the worst-case scenario, where all the tariffs threats and retaliation are implemented, and business confidence erodes, could cut a half point or $430 billion off global GDP in 2020.
“While all countries will ultimately be worse off in a trade conflict, the US economy is especially vulnerable because so much of its global trade will be subject to retaliatory measures,” said Lagarde.
Because US President Donald Trump launched the current trade war, retaliation and negative impact will be focused on the US economy, leaving other regions to continue trading amongst themselves.
Trump, who said trade wars were “good and easy to win,” imposed steep tariffs on all steel and aluminum imports, angering key allies and prompting swift retaliation.
He also hit China with 25pc duties on $34bn in goods, with another $16bn on the way. And $200bn more could be targeted as soon as September.
A range of bad outcomes
The IMF report to the G20 presents a range of scenarios showing the subtraction from global GDP is likely to be minor unless Trump imposes blanket tariffs on the US auto sector.
Blanket tariffs on the hundreds of billions of dollars in foreign autos Americans buy annually would reduce US GDP by 0.6 points in the first year, while Japan would lose 0.2 percentage points, the report showed.
If he follows through on threats to impose 10pc duties on an additional $200bn in Chinese imports, this could shave 0.2 points off US growth in the first year, according to the IMF.
Lagarde also cited other problems on the horizon, including stuttering emerging market economies, as investors have taken $14bn out of the markets between May and June, causing some central banks to raise interest rates.
The capital flight could worsen as the US Federal Reserve continues to raise interest rates, making an investment in the US more attractive.
She once again urged emerging market authorities to maintain flexible exchange rates, tamp down credit growth and reduce debt levels to prepare themselves.
Furthermore, IMF member countries may not fully appreciate how technology is changing the composition of their labor forces, and how it could worsen inequality.
