Abu Dhabi, UAETuesday 16 July 2019

IMF cuts China's growth forecast as global economy set to slow down on trade woes

The world's second largest economy is expected to slow down to 6.3% in 2019

International Monetary Fund Managing Director Christine Lagarde speaks at the American Enterprise Institute in Washington, DC, USA on 05 June 2019. Ms Lagarde discussed the state of the global economy ahead of the upcoming G20 summit in Osaka, Japan. EPA/ERIK S. LESSER
International Monetary Fund Managing Director Christine Lagarde speaks at the American Enterprise Institute in Washington, DC, USA on 05 June 2019. Ms Lagarde discussed the state of the global economy ahead of the upcoming G20 summit in Osaka, Japan. EPA/ERIK S. LESSER

The International Monetary Fund is cutting the global economy’s growth 0.5 per cent in 2020 while lowering China's growth forecast this year and next due to uncertainty from strained ties between Beijing and Washington.

The world's second biggest economy's growth will slow to 6.2 per cent in 2019 and 6 per cent in 2020, down from earlier forecasts of 6.3 per cent and 6.1 per cent respectively, the IMF said at a Beijing conference Wednesday. The lender warned escalating tensions may require further policy easing.

"The near-term outlook remains particularly uncertain given the potential for further escalation of trade tensions," said Kenneth Kang, deputy director of Asia & Pacific Department at the IMF.

The US-China trade war initiated by President Donald Trump, has hurt the global economy's growth prospects, denting profitability in industries such as aviation, disrupting global supply chains, damaging investor sentiment and roiling markets. Talks between Beijing and Washington to resolve the trade dispute have stalled, leaving in place tariffs on $360 billion worth of goods between the world's two biggest economies.

Escalating tariff threats are weakening business and investor confidence and threatening an outlook for improved global growth next year, Christine Lagarde, IMF's managing director, told Reuters.

However, the Washington-based lender doesn't see the threat of a global recession as a result of the US-China trade dispute and Washington potentially slapping tariffs on Mexican goods and cars, she said.

China has taken a series of measures to stimulate its slowing economy, from accelerating infrastructure spending to introducing tax cuts to support businesses.

"The policy stimulus announced so far is sufficient to stabilize growth in 2019 and 2020 despite the recent US tariff hikes," Mr Kang said. "No additional policy easing is needed, provided there are no further increases in tariffs or a significant slowdown in economic growth."

Mr Kang cautioned that risks to China's economy will increase if the trade spat worsens and some additional policy easing would be warranted.

"Let me be clear, if tariffs do go up to, say, 25 per cent across the board, that, with growth will be affected significantly," he said. "In this case, we do see a case for a temporary stimulus to support the economy, especially if there is a risk to economic and financial stability."

Any stimulus should be "contained" and focused on rebalancing growth sustainably, he said.

The IMF recommends monetary policy should focus on domestic conditions and on the outlook and risks to inflation, he said. The fund projects headline inflation will rise to 2.3 per cent in 2019, from 2.1 per cent in 2018, reflecting higher food prices.

The IMF acknowledged China's efforts to reduce credit growth and corporate debt, but urged Beijing to forge ahead with structural reforms despite the ongoing trade war.

"The priority should be to fully implement the announced regulatory reforms and continue with structural regulatory reforms to reduce still-elevated vulnerabilities," Mr Kang said. "Bank capital, especially for small and medium-size banks, should be strengthened and micro-prudential regulations should not be relaxed."

Ms Lagarde said the global economy is forecast to expand 3.3 per cent this year, at a slower pace due to risks such as the collapse of US-China trade talks.

Concerns that trade tensions may derail global growth are turning into reality and contributing to a wide-ranging slowdown in the world economy, Ms Lagarde said at an event held at the American Enterprise Institute in Washington Wednesday.

“This fragility that we had identified and the precariousness of the recovery is actually confirmed,” Ms Lagarde. "We’re now seeing this synchronized deceleration of growth.”

Updated: June 6, 2019 03:41 PM

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