IMF cuts global growth forecast again as Brexit and trade wars dampen outlook

World economic growth is already at the lowest level in a decade

The IMF chief economist Gita Gopinath believes more needs to be done on the international front to help emerging market, developing and low income countries as they look to cope with the impact of the Covid-19 pandemic. AP
The IMF chief economist Gita Gopinath believes more needs to be done on the international front to help emerging market, developing and low income countries as they look to cope with the impact of the Covid-19 pandemic. AP

The International Monetary Fund on Tuesday cut its global growth forecast for the year for the fourth time since October, saying trade tensions and continued Brexit uncertainty could impede a “precarious” recovery next year.

Global economic growth, already at the lowest level since the 2008 financial crisis, is estimated to slow to 3.2 per cent in 2019, a 0.1 percentage point drop from the IMF’s 3.2 per cent projection last April, as lower inflation and softer growth projections of economies around the world point to weaker economic activity.

The world economy will accelerate 3.5 per cent in 2020, slower than the April projection of 3.6 per cent, the international lender said in its latest World Economic Outlook.

“Policy actions and missteps have played an important role in shaping these outcomes, not least through their impact on market sentiment and business confidence,” the IMF said. Errors in policymaking and the associated uncertainties will have a “severely debilitating effect on sentiment, growth and job creation”.

The projected growth pickup next year also remains precarious and hinges on several factors, IMF's chief economist said.

“Close to 70 per cent of this improvement relies on an improvement in growth performance in stressed emerging markets and developing economies, and is therefore subject to high uncertainty,” Gita Gopinath, IMF economic counsellor and director of research, said.

The global output revision is the fourth by the IMF in the past nine months, mainly as a result of a trade war between the US and China, the two largest economies. Since the IMF’s review last April, the US further increased tariffs on some Chinese imports and China retaliated by raising levies on a subset of American goods.

However, the two countries agreed to a temporary pause on imposing additional duties following the June G20 meeting, where President Donald Trump and his Chinese counterpart Xi Jinping agreed to resume trade negotiations.

US Trade Representative Robert Lighthizer, along with senior officials, will travel to China next Monday for a high-level, face-to-face negotiation with Chinese authorities. The meeting will involve a broad discussion of the issues outstanding and isn’t expected to yield major breakthroughs, according to Bloomberg.

Global equities rallied after the IMF cut growth outlook, which comes a week before the US Federal Reserve is due to meet and expected to lower interest rates. The S&P 500 was up 0.6 per cent, the Dow 0.6 per cent and Nasdaq 0.5 per cent at the close of US trading late Tuesday.

Continued confusion over the UK’s divorce from the European Union is another cloud hanging over the global economy. Newly elected British Prime Minister Boris Johnson said his government will leave the European bloc with or without a deal by the October 31 deadline. However, a disorderly Brexit will have implications for global trade, the IMF said.

“Global growth is sluggish and precarious but it does not have to be this way, because some of this is self-inflicted,” Ms Gopinath said.

Trade volume growth globally declined to around 0.5 percent year-on-year in the first quarter of 2019 and is expected to slow to 2.5 per cent this year. Volumes are expected to bounce back, growing 3.7 per cent, which is at par with the pace of growth in 2018, but lower than 5.5 per cent in 2017, the IMF said.

“The principal risk factor to the global economy is that adverse developments –including further US-China tariffs, US auto tariffs, or a no-deal Brexit – sap confidence, weaken investment, dislocate global supply chains, and severely slow global growth below the baseline,” according to the fund.

Emerging and developing Asia is expected to grow 6.2 per cent this year and next. China’s GDP is forecast to expand 6.2 per cent in 2019 and 6 per cent in 2020, a 1 percentage point drop for each year, relative to April's projections.

India’s economy is set to grow 7 per cent this year, picking up to 7.2 per cent in the next. The downward 0.3 percentage point revision for both years reflects a weaker-than-expected outlook for domestic demand in Asia’s third largest economy, the IMF said.

For advanced economies, growth is projected at 1.9 per cent in 2019 and 1.7 per cent in 2020, 0.1 percentage point higher than in April. The US is expected to see a 2.6 per cent growth GDP growth, a 0.3 percentage point jump from IMF’s last estimate, moderating to 1.9 per cent in 2020 as the fiscal stimulus unwinds. Growth in the euro area is projected at 1.3 per cent in 2019 and 1.6 per cent in 2020, the IMF said.

Economies in the Middle East, North Africa, Afghanistan and Pakistan are forecast to expand by 1 per cent in 2019, a 0.5 percentage point drop from April estimates, largely due to the downward revision to the forecast for Iran, which is facing crippling US sanctions.

Growth in the region is expected to accelerate to about 3 per cent in 2020 on the improved prospects for Saudi Arabia’s economy, where the non-oil sector is expected to strengthen this year on the back of higher government spending and improved business confidence. The oil sector growth is also projected to grow next year.

Updated: July 24, 2019 01:07 PM


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