(Bloomberg) — The global economy is heading toward year end with unexpected tailwinds as slowing inflation clears a path for an unlikely soft landing. But while the economics side of the equation is looking up, political hurdles lie ahead. 

Hanging over the outlook is the toss-up US presidential election that offers starkly different economic outcomes for the world.

That comes on top of soaring government debt, escalating conflict in the Middle East, the grinding war between Russia and Ukraine, and tensions in the Taiwan Strait.

That’s the fraught backdrop for finance ministers and central bank chiefs gathering in Washington this week for the annual meeting of the International Monetary Fund and World Bank. 

“Don’t expect any victory parties,” IMF Managing Director Kristalina Georgieva said Thursday in remarks previewing the meetings. “My expectation is people would leave from here somewhat uplifted, somewhat more scared — hopefully, scared to get them into high gear to act.” 

Unemployment in advanced economies remains the same as where it was in 2022, around the time central banks began to lift borrowing costs at the fastest pace in decades, according to the OECD. 

Bloomberg Economics is forecasting global GDP will grow by 3% this year, below the 3.3% pace of 2023, but well clear of bearish forecasts at the start of the year. 

America’s consumers continue to spend and its companies keep hiring. And while demand is weakening across Europe, the economy should continue to grow.

Meanwhile, Chinese policy makers are rolling out stimulus by the day to put a floor under the property sector. Those measures may not be living up to bullish stock traders’ hopes, but they should be enough to help the economy get close to this year’s growth target of about 5%. 

But the resilience of the world’s major economies is about to be tested. 

While Vice President Kamala Harris has offered broad policy continuity with President Joe Biden’s administration, her opponent, former President Donald Trump, has outlined policies that would send shock waves through world trade.

Trump has threatened to apply tariffs of at least 10% on all imported goods and 60% — or higher – on goods from China. That’s a recipe that would sow “chaos for business” according to joint analysis by Wendy Edelberg of the Brookings Institution and Maurice Obstfeld of the Peterson Institute for International Economics.

Trump doesn’t see it that way. 

“The higher the tariff, the more likely it is that the company will come into the United States, and build a factory in the United States so it doesn’t have to pay the tariff,” the former president told Bloomberg News Editor-in-Chief John Micklethwait on in an Oct. 15 interview at the Economic Club of Chicago. 

Yet economic projections show it’s the US that has most to lose. If China retaliates against the kind of tariffs proposed by Trump, US GDP might be 0.8% lower by the time of the 2028 elections, according to Bloomberg Economics. The hit to the Chinese economy would be about half, and smaller still for the EU and Japan.

Europe would face more damage if Chinese goods find their way to the region at a time when manufacturers are already struggling with weak demand. Investment never fully recovered after the pandemic and has declined since the end of last year, while private spending remains lackluster despite strong wage gains, easing inflation pressures and a thus-far solid labor market. 

On Thursday, the ECB lowered interest rates for the third time since June, suggested inflation would return to the 2% target sooner than previously predicted and expressed confidence that a recession can be avoided.

“We are still looking at that soft landing,” President Christine Lagarde told reporters following the decision, adding that a new trade war would jeopardize such an outcome. 

“Any restriction, any uncertainty, any obstacles to trade matters for an economy like the European economy, which is very open,” she said.

Wars, Debt

The specter of a trade war looms as real fighting continues to rage in Ukraine and the Middle East.

A full-blown war in the Middle East would have consequences far beyond the region. Bloomberg Economics estimates that oil at $100 a barrel and a risk-off move in financial markets would subtract half a percentage point from global growth over the next four quarters and leave inflation 0.6 points higher.

Debt is another risk. Whenever the next slowdown does come, governments will have fewer options on how to respond. The IMF has tallied that global public debt is set to reach $100 trillion, or 93% of global gross domestic product, by the end of this year and has warned governments will need to make tough decisions to stabilize borrowing. 

The US Treasury Department on Friday reported that Washington’s debt interest-cost burden has climbed to a 28-year high, a combination of massive budget deficits and higher interest rates.

“I’m very worried about the lack of fiscal space and also whether worries about inflation might lead to suboptimal decisions about the fiscal response to a big shock,” said Karen Dynan, a Harvard Kennedy School professor and former Fed economist. “Monetary policy will face hard trade offs.”

That’s why both geopolitics and debt are top of mind for policymakers gathering in Washington. 

“How can you have a soft landing in a world that’s falling apart? I don’t think the US or any economy can soft-land in the current environment,” said Peter Praet, a former ECB chief economist. “There will be shocks.”

–With assistance from Zoe Schneeweiss.

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