Wed | Sep 23, 2020

IMF downgrades outlook for world economy, citing trade wars

Published:Wednesday | October 16, 2019 | 1:36 AM
The  International Monetary Fund headquarters in Washington.
The International Monetary Fund headquarters in Washington.

The International Monetary Fund (IMF) is further downgrading its outlook for the world economy, predicting that growth this year will be the weakest since the 2008 financial crisis, primarily because of widening global conflicts.

The IMF’s latest World Economic Outlook released Tuesday foresees a slight rebound in 2020 but warns of threats ranging from heightened political tensions in the Middle East to the threat that the United States and China will fail to prevent their trade war from escalating.

The updated forecast was prepared for the fall meetings this week of the 189-nation IMF and its sister lending organisation, the World Bank. Those meetings and a gathering Friday of finance ministers and central bankers of the world’s 20 biggest economies are expected to be dominated by efforts to de-escalate trade wars.

The new forecast predicts global growth of 3 per cent this year, down 0.2 percentage point from its previous forecast in July and sharply below the 3.6 per cent growth of 2018. It would be the weakest year since global growth was a negative 0.1 per cent in 2009 as the global economy struggled with the shockwaves from the 2008 financial crisis.

For the United States this year, the IMF projects a modest 2.4 per cent gain, down from 2.9 per cent in 2018.

Next year, the fund foresees a rebound for the world economy to 3.4 per cent growth but a further slowdown in the United States to 2.1 per cent, far below the 3 per cent growth the Trump administration projects.

IMF economists cautioned that that even its projected modest gains might not be realised.

China’s growth is projected to dip to 6.1 per cent this year and 5.8 per cent next year. These would be the slowest rates since 1990, when China was hit by sanctions after the brutal crackdown on pro-democracy demonstrators in Beijing’s Tiananmen Square.

“With a synchronised slowdown and uncertain recovery, there is no room for policy mistakes, and an urgent need for policymakers to cooperatively de-escalate trade and geopolitical tensions,” Gita Gopinath, the IMF’s chief economist, said.

Last week, the United States and China reached a temporary ceasefire in their trade fight when President Donald Trump agreed to suspend a tariff hike on US$250 billion of Chinese products that was to take effect this week. But with no formal agreement reached and many issues yet to resolved, further talks will be needed to achieve any meaningful breakthrough. The Trump administration’s threat to raise tariffs on an additional US$160 billion in Chinese imports on December 15 remains in effect.

The IMF’s forecast predicted that about half the increase in growth expected next year will result from recoveries in countries where economies slowed significantly this year, as in Mexico, India, Russia and Saudi Arabia.

The global economy will also get a boost from recoveries or at least more shallow recessions in various stressed emerging market economies such as Turkey, Argentina and Iran.

This year’s slowdown, the IMF said, was caused largely by trade disputes, which resulted in higher tariffs being imposed on many goods. Growth in trade in the first half of this year slowed to 1 per cent, the weakest annual pace since 2012.

Kristalina Georgieva, who will preside over her first IMF meetings after succeeding Christine Lagarde this month as the fund’s managing director, said last week that the various trade disputes could produce a loss of around US$700 billion in output by the end of next year or about 0.8 per cent of world output.

IMF economists said one worrisome development is that the slowdown this year has occurred even as the US Federal Reserve and other central banks have been cutting interest rates and deploying other means to bolster economies.

The IMF projects that growth in the 19-nation euro area will slow to 1.2 per cent this year, after a 1.9 per cent gain in 2018. It expects the pace to recover only slightly to 1.4 per cent next year.

For Japan, the IMF expects growth of just 0.5 per cent next year. It foresees an expansion in Russia of 1.9 per cent, up from 1.1 per cent this year.