IMF flags trade war threat and warns of global economic slowdown
Fund revises down growth forecasts to 3.5% this year and 3.6% in 2020
Chris Giles in Davos
The IMF’s revised estimates represent a significant shift for the global economic outlook © AFP
The global economy is weakening faster than expected as trade wars and financial market volatility further undermine the investment climate, the IMF said on Monday at the start of this year’s World Economic Forum in Davos.
World leaders and business titans have converged on the Swiss ski resort, chastened by the recent economic weakness from Asia to Europe, saying that populism and the policies of international conflict are taking their toll on global economic prospects.
Corporate bosses have been left reeling by the rapid change in sentiment that has followed a ratcheting up of trade tensions over the past year and Monday’s news that China’s official growth rate had slowed to its weakest level since 1990.
Alongside the downgrades in the IMF’s growth forecasts, a survey of chief executives by PwC noted a sharp jump in pessimism compared with their almost universal buoyancy a year ago.
The PwC survey showed that almost a third of chief executives believing the global outlook would darken compared with only 5 per cent a year ago. “With the rise of trade tension and protectionism it stands to reason that confidence is waning,” said Bob Moritz, the professional services group’s global chairman.
The IMF blamed its more pessimistic forecasts mostly on weaknesses in Europe and Japan that slowed momentum in the global economy. It said the biggest downgrades had come in advanced economies where growth was set to drop from 2.3 per cent in 2018, to 2 per cent in 2019 and 1.7 per cent in 2020.
Some of the effects of trade wars had already been felt, the IMF said, which had led to the weakening of global trade growth. More concerning, the outlook could be even worse.
“The true underlying impetus could be even weaker than the data indicate, as the headline numbers may have been lifted by import front-loading ahead of tariff hikes, as well as by an uptick in tech exports with the launch of new products,” the IMF said.
This concern about trade and globalisation was echoed on Monday by the UN’s trade and development body, which reported a 19 per cent fall in global foreign direct investment in 2018 as US companies repatriated funds to take advantage of new tax breaks, pulling money out of the global economy.
These forces led the IMF to revise down its main economic forecasts, with the fund now predicting that the global economy would slow from 3.7 per cent growth in 2018, to 3.5 per cent in 2019 and 3.6 per cent in 2020. The uptick in 2020 was due to expectations that Turkey and Argentina would suffer deep recessions in 2019, before recovering the following year.
The new estimates are 0.2 percentage points and 0.1 percentage points respectively below the IMF’s more recent forecasts in October.
The IMF report painted a fragile picture of the world economy at a time when leaders have become more focused on domestic matters. It called for greater international co-operation to give business more confidence to invest in the future.
Gita Gopinath, the new IMF chief economist, said: “The downward revisions are modest. However, we believe the risks to more significant downward corrections are rising.”
“The cyclical forces that propelled broad-based global growth since the second half of 2017 may be weakening somewhat faster than we expected in October . . . While this does not mean we are staring at a major downturn, it is important to take stock of the many rising risks,” she added.
One specific risk highlighted by the IMF was that Britain would exit the EU without a negotiated agreement — a no-deal Brexit. The fund said this outcome was a “rising possibility” that could have negative spillovers across Europe.
As China reported its weakest growth since 1990, the IMF predicted the slowdown could be steeper than expected, which Ms Gopinath said might “trigger abrupt sell-offs in financial and commodity markets as was the case in 2015-16”.
The fund also expressed concern about the budgetary position of Italy, which is suffering from weakness in its banking sector. “A protracted period of elevated [Italian bond] yields would put further stress on Italian banks, weigh on economic activity, and worsen debt dynamics,” the IMF said in its report.
The fund called on countries to resolve trade tensions and for a smooth Brexit, all of which are more difficult because the US and UK administrations will be absent from Davos due to mounting domestic crises.
“The main policy priority is for countries to resolve cooperatively and quickly their trade disagreements and the resulting policy uncertainty, rather than raising harmful barriers further and destabilising an already slowing global economy,” Ms Gopinath said.
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