IMF warns trade tensions could undermine global economic growth

by Ike Obudulu Posted on January 21st, 2019

The International Monetary Fund has warned that escalating trade tensions could undermine global economic growth.

In a new report on the world economic outlook, the IMF also warns of risks from a no-deal Brexit.

For the world economy, the IMF is now predicting growth of 3.5% in 2019. In October, it forecast 3.7%.

For the UK, the report predicts growth of about 1.5% this year and next, but it also says there is substantial uncertainty around that figure.

The global figure represents weaker growth than last year.

Tariff increases imposed by the Trump administration in the US and its counterpart in Beijing have already contributed to a previous downgrade.

The IMF also expects China’s slowdown to continue. The forecast for this year and next is 6.2%.

In this new assessment, there are revisions for the developed economies, particularly the eurozone.

That reflects disruptions to the motor industry in Germany from new fuel emissions standards.

There are also concerns about Italy, where financial markets have been unsettled by government plans to expand spending. There are continued weaknesses in the country’s banking system as well.

The outlook for the UK is especially uncertain, although there is a small upward revision to the forecast for next year. The 2019 figure is unchanged.

The predictions are based on the assumption that a Brexit deal is reached this year and that there is a gradual transition to the new relationship with the European Union. The IMF has warned before that a no-deal Brexit would involve substantial costs for the British economy.

There are also a range of factors that weigh on the outlook for some emerging and developing economies. Iran is affected by sanctions, Saudi Arabia by weaker oil production.

The economies of both Turkey and Argentina are predicted to contract, as is Venezuela’s, but it is likely to be even more severe in that case than previously expected.

All that said, the main global forecast of 3.5% does, nonetheless, still constitute a respectable increase in economic activity.

But the concern that it might not turn out so well is unmistakable.

Trade tensions appear to be the biggest worry and they have been a recurrent theme in recent IMF assessments of the economic outlook. That is reflected in the IMF’s call for action from its member countries’ governments.

“The main shared policy priority is for countries to resolve co-operatively and quickly their trade disagreements and the resulting policy uncertainty, rather than raising harmful barriers further and destabilising an already slowing global economy,” the IMF said.

The report recalls that in its October forecast, there had already been a downgrade, partly due to the impact of the tariff increases enacted by the US and China.

‘Escalating risks’

The IMF also says there are risks from financial markets.

The IMF’s chief economist, Gita Gopinath, said: “While financial markets in advanced economies appeared to be decoupled from trade tensions for much of 2018, the two have become intertwined more recently, tightening financial conditions and escalating the risks to global growth.”

In addition to global trade tensions, the report mentions a more substantial slowdown in China and a no-deal Brexit as possible triggers for a future deterioration in financial markets.

The general thrust of this report is that the IMF expects the recovery from the great recession of 2008-09 to continue. But the clouds, though, are gathering.

A survey by auditing and accounting giant PwC of nearly 1,400 chief executives found that 29 percent believe global economic growth will decline over the next 12 months, the highest percentage since 2012.

While the most pronounced shift was among business leaders in the United States, the share of CEOs who expected growth to slow increased significantly across every region, it showed.

“It’s quite a reversal from last year and the gloomier mood cuts across just about everywhere in the world,” said Bob Moritz, global chairman at PwC.

“With the rise of trade tension and protectionism, it stands to reason that confidence is waning.”

Tim Ryan, U.S. Chairman at PwC, said: “We were a little bit spoiled by the environment the past six to eight years after the financial crisis,” describing an uncertain economy as the new normal.

“People are getting used to the volatility.”

Fears of a global slowdown have jolted markets and forced the U.S. Federal Reserve Bank to signal a pause in its interest rate hike cycle, as investors fret about increasing weak signs in China and the fallout from Sino-U.S. trade frictions.

Data released on Monday showed China’s economy cooled in the fourth quarter on faltering domestic demand and bruising U.S. tariffs, dragging 2018 growth to the lowest in nearly three decades.

“Sometimes we spook ourselves, so it remains to be seen how slow is slow, how bad is bad, let’s see how the first quarter looks,” said Cha.

Analysts  also saw a higher chance Japan will slide into a recession, keeping the country’s central bank under pressure to maintain its massive stimulus.

The IMF cut its growth projections for the euro zone and developing countries, while maintaining its forecast for a 2.5 percent expansion in the United States this year.

It also kept its China growth forecast at 6.2 percent in both 2019 and 2020, but said economic activity could miss expectations if trade tensions persist, even with state efforts to spur growth by boosting fiscal spending and bank lending.

“As seen in 2015–16, concerns about the health of China’s economy can trigger abrupt, wide-reaching sell-offs in financial and commodity markets that place its trading partners, commodity exporters, and other emerging markets under pressure,” it said.

Britain is expected to achieve 1.5 percent growth this year though there is uncertainty over the projection, which is based on the assumption of an orderly exit from the EU, it said.

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