Christine Lagarde has warned that rising tariffs between the world’s two largest economies were “self-inflicted wounds” that would hit the already precarious global recovery, calling on both Washington and Beijing to immediately remove the levies.

The International Monetary Fund chief said the group’s economists believe the recently-imposed tariffs by the US and China would cut global growth by 0.3 per cent next year. When earlier tariffs are added, the IMF sees a 0.5 per cent hit to growth — or about $455bn, “larger than the size of South Africa’s economy”.

The report, published ahead of this weekend’s meeting of finance ministers from the Group of 20 industrial powers in Japan, came amid renewed signs that the US economy could be losing momentum.

A closely watched measure of employment, a monthly report from payroll processor ADP, showed the private sector in the US had added the fewest jobs in more than nine years, with employers outside the agricultural sector adding just 27,000 positions last month, badly missing expectations.

“Job growth is moderating. Labour shortages are impeding job growth, particularly at small companies, and lay-offs at bricks-and-mortar retailers are hurting,” said Mark Zandi, chief economist of Moody’s Analytics.

Despite the gathering clouds around the global economy, Wall Street rallied for a second day on expectations the bad economic news would force the Federal Reserve to cut rates two or three times this year to keep the US economy on track.

Federal funds futures data suggest the odds of at least three quarter-point reductions in the Fed’s benchmark rate this year were at about 63 per cent on Wednesday, from 53 per cent a day earlier. Just a month ago, the implied probability of such a scenario was effectively nil.

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Jay Powell, the Fed chairman, and other members of the central bank’s rate-setting committee signalled this week that they were prepared to cut rates for the first time since the financial crisis in the face of the mounting headwinds.

Ms Lagarde has been warning for months about the risks the trade war launched by President Donald Trump could have on the global economy, but her remarks on Wednesday were among her most pointed to date.

“These are self-inflicted wounds that must be avoided. How? By removing the recently implemented trade barriers and by avoiding further barriers in whatever form,” she wrote in a statement accompanying the IMF forecast.

Although Mr Trump and his Chinese counterpart Xi Jinping are due to discuss their tariff stand-off at a summit next month, there are few signs either side is backing down.

The US increased tariffs on $250bn worth of Chinese goods in May, while Beijing responded with additional levies on nearly $60bn of US imports. Mr Trump has threatened to place tariffs on another $300bn in imports from China.

Mr Trump has shown a willingness to use tariffs as a policy tool more broadly, announcing he would impose new tariffs on goods shipped from Mexico in an effort to coerce the Mexican government into firmer action on illegal immigration.

Ms Lagarde said those tariffs are “also of concern”, and some congressional Republicans have rebelled against the move, particularly in the Republican-controlled Senate, which is weighing an effort to block the tariffs.

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US leaders, including vice-president Mike Pence and secretary of state Mike Pompeo were due to meet a high-level Mexican delegation at the White House on Wednesday to discuss their differences.

One in five of the major Mexican companies with cross-border interests — including key car parts manufacturers, fridge maker Mabe, state energy company Pemex and the producer of José Cuervo tequila — could see their revenues hurt if the US goes ahead with tariffs starting next Monday, Fitch Ratings reported on Wednesday.

Fitch estimated that 20 per cent of the 41 major cross-border issuers for which it provide ratings would feel the pain.

Additional reporting by Jude Webber in Mexico City

Via Financial Times