IMF Downgrades Global GDP Over Trade Tensions

by Bamidele Ogunberu Posted on October 10th, 2018

Washington D.C., USA : The International Monetary Fund (IMF) cut its forecast on global economic growth on Tuesday to 3.7 percent for 2018 and 2019, 0.2 percentage point lower for both years than its April estimate, citing rising trade protection and the instability in emerging markets.

According to the latest World Economic Outlook, the United States is expected to grow slower at 2.5 percent next year due to recently announced trade measures, including the tariffs imposed on $200 billion of US imports from China. In April’s forecast, the IMF anticipated a 2.7 percent increase in the US economy.

Growth in the United States and China, the world’s two largest economies, were both estimated to be dampened by the escalating trade tensions, with China’s projection for 2019 shaved by 0.2 percentage point to 6.2 percent.

The growth projection of the U.S. for 2019 was also cut 0.2 percentage point to 2.5 percent, after factoring in the impact of tariffs imposed by the country and retaliatory duties by other nations.

“Escalating trade tensions and the potential shift away from a multilateral, rules-based trading system are key threats to the global outlook,” said the report, as trade tensions and policy uncertainty could affect confidence and tighten financial conditions in advanced economies.

US growth will decline as the fiscal stimulus begins to unwind in 2020, at a time when the monetary tightening cycle is expected to be at its peak, the report noted.

Escalating trade tensions and the potential shift away from a multilateral, rules-based trading system are key threats to the global outlook, WEO warned.

It added that intensification of trade tensions, and the associated rise in policy uncertainty, could dent business and financial market sentiment, trigger financial market volatility, and slow investment and trade.

“Higher trade barriers would disrupt global supply chains and slow the spread of new technologies, ultimately lowering global productivity and welfare. More import restrictions would also make tradable consumer goods less affordable, harming low-income households disproportionately.”

IMF chief economist Maurice Obstfeld said in a statement, ” Without multi-lateralism, the world will be a poorer and more dangerous place”.

This was the first time the IMF downgraded the world economic outlook since July 2016, as “downside risks to global growth have risen in the past six months”. Major rising risks threatening growth were trade barriers and financial tensions, as well as capital flight from emerging market economies, the report said.

Dong Dengxin, an economics professor at Wuhan University of Science and Technology, said trade tensions also hurt the world economy by raising costs for consumers and enterprises as a result of disrupting international specialization and cooperation. “This will in turn weigh on the growth of consumption and investment,” he said.

Dong said the negative impact of trade conflicts on China and the U.S. could be a major drag on the world economy as the two countries are the biggest engines of world economic growth.

According to the IMF, financial tensions — the other major risk faced by the global economy — could be fueled by sharper-than-expected rises in U.S. interest rates which accelerate capital flight from emerging markets.

Interest rate hikes in the U.S. could put pressure on emerging market economies’ currency rates against the greenback and prompt short-term capital outflows, said Zhang Ming, a researcher at the Chinese Academy of Social Sciences.

“There exists the probability of some vulnerable emerging market economies falling into financial crises of different forms,” he said.

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