Trade woes prompt IMF to lower global growth forecasts

The International Monetary Fund lowered its global growth forecast for 2019 and 2020, and warned of the dangers from escalating trade tensions that have already started to dampen the world economic outlook.

The global economy is set to expand 3.5 per cent in 2019 and 3.6 per cent the year after, 0.2 and 0.1 percentage points lower than the fund's October forecasts. Growth for 2018 was kept unchanged at 3.7 per cent.

“The further downward revision since October in part reflects a carry over from softer momentum in the second half of 2018… but also weakening financial market sentiment,” the Washington lender said on Monday.

The world economy is slowing down as trade tensions between the United States and China, the world’s two largest economies, intensify. Last year, the US slapped 10 per cent tariffs on $200 billion worth of Chinese goods, which could go up to 25 per cent if negotiations between the two fail before the March 1 deadline. Washington and Beijing agreed to a 90-day truce in December to allow time for trade talks to take shape.

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“While global growth in 2018 remained close to post-crisis highs, the global expansion is weakening and at a rate that is somewhat faster than expected,” said Gita Gopinath, director of research at the IMF.

“Higher trade uncertainty will further dampen investment and disrupt global supply chains. A more serious tightening of financial conditions is particularly costly given the high levels of private and public sector debt in countries.”

Ms Gopinath warned a faster-than-expected slowdown in China because of trade tensions can unleash a massive sell-off in financial and commodity markets, similar to that of 2015-2016.

On Monday, China said its economy grew at the slowest pace in the fourth quarter since the 2009 financial crisis. Growth decelerated to 6.4 per cent during the period from 6.5 per cent in the previous quarter. In early January, Apple's shares plunged 10 per cent, the largest single drop in six years for the technology company after it cut its revenue guidance on the back of headwinds in China.

“While the December 1 announcement that tariff hikes have been put on hold for 90 days in the US-China trade dispute is welcome, the possibility of tensions resurfacing in the spring casts a shadow over global economic prospects,” the fund said. “Equity valuations—which were stretched in some countries – have been pared back with diminished optimism about earnings prospects amid escalating trade tensions and expectations of slower global growth.”

Another worry is a no-deal Brexit, Ms Gopinath added. Fears over UK crashing out have dismayed financial institutions and raised concerns over supply chains and unsettled Asian companies.

Forecasts for the advanced economies were lowered by the fund in 2019 to 2 per cent, a 0.1 percentage point lower than in its October projection due to slower growth in the eurozone.

In the eurozone, growth is set to decelerate to 1.6 per cent in 2019 from 1.8 percent in 2018, mainly due to the slowdown in Germany. Projections for the US remained unchanged at 2.5 per cent for 2019 and 1.8 per cent in 2020.

Growth in emerging markets in 2019 will reach 4.5 per cent, a 0.2 percentage point lower than in the October forecast.

Oil price forecasts were also revised downward to below $60 a barrel in 2019 and 2020, down from $69 a barrel and $66 a barrel, respectively, in the October projections.

“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. “Across all economies, measures to boost potential output growth, enhance inclusiveness, and strengthen fiscal and financial buffers in an environment of high debt burdens and tighter financial conditions are imperatives.”