IMF revises global economy outlook on protectionism and geopolitics
The revision is the fund's fifth as trade tensions and Brexit uncertainty crimp growth
The global economy is in a “synchronised slowdown” and projected to grow 3 per cent this year, its slowest expansion since the 2008 global financial crisis, as a result of protectionist policies and increased uncertainty related to trade and geopolitics that have strained emerging market economies, according to the International Monetary Fund.
The fund’s estimate is a 0.3 percentage point downgrade from its April forecast and marks the fifth revision of the organisation’s outlook on the global economy, which grew 3.6 per cent last year. The global economy is forecast to pick up to 3.4 per cent in 2020, a 0.2 percentage point reduction from the earlier forecast. Subdued momentum in manufacturing is at the lowest in more than a decade, according to the fund. The fund's last revision was in July.
Global growth figures for this year would have been an additional 0.5 per cent lower in the absence of monetary stimulus by central banks, which cushioned the impact of escalating US-China trade tensions, the fund’s chief economist Gita Gopinath said in the 208-page World Economic Outlook report released on Tuesday during the annual IMF World Bank meetings in Washington DC.
“A notable feature of the sluggish growth in 2019 is the sharp and geographically broad-based slowdown in manufacturing and global trade,” she said. The downturn is driven by higher tariffs and prolonged uncertainty surrounding trade policy which have dented investment and demand for heavily-traded capital goods.
Growth would be reduced by 0.8 per cent by the end of 2020 if scheduled October and December tariffs are imposed, Ms Gopinath said in a briefing on Tuesday.
The removal of all existing and scheduled scheduled would boost the global economy by 0.8 per cent by the end of 2020, she added.
The world’s two largest economies are seeing their economies slow. The US economy will decelerate to 2.4 per cent, and China, which has recorded more than a decade of expansion, is forecast to slow to 6.1 per cent. Key issues remain between the two countries despite news of a breakthrough in trade talks last week, which will make lifting the cloud of uncertainty more difficult.
The fund cited a contracting of the globally interconnected automobile industry, where purchases of cars across the world declined 3 per cent, as a result of tapering demand in China impacted by expiring tax incentives, and companies in the eurozone increasingly complying with emissions standards.
As a result of uncertainty related to escalating US-China trade tensions, business confidence has ebbed, with manufacturing firms becoming more cautious about long-term spending and cutting back on equipment and machinery purchases. Consequently, trade volume growth globally in the first half of 2019 reached 1 per cent, the weakest level since 2012.
Brexit uncertainty continues to hold back investment in the UK, the world’s sixth largest economy, which is projected to grow 1.2 per cent in 2019 from 1.4 per cent last year, according to the fund. Exports have weakened and the pound has depreciated 4 per cent because of concern over a no-deal Brexit. The euro area is forecast to grow 1.2 per cent this year, down from 1.9 per cent in 2018.
These forecasts are based on an assumption that a Brexit deal will be agreed and Britain's transition out of the Union will be smooth.
“In the absence of that, if there were to be no agreement, no-deal Brexit, that would reduce UK GDP by 3 per cent over the longer term", Ms Gopinath said.
In the medium term, it would reduce UK GDP by 3 to 5 per cent "depending on how disruptive it is," she said.
The economies of the Middle East and Central Asia will grow 0.9 per cent this year, rising to 2.9 per cent in 2020. The forecast is 0.9 and 0.4 percentage points lower, respectively, than a forecast given for the region in April. The downward growth revision of the region is largely because of the impact of US sanctions on Iran’s economy which has crimped output. Iran's economy is set to contract 9.5 per cent this year after shrinking 4.8 per cent in 2018. Inflation in Iran is projected to rise to about 36 per cent this year the fund said, from 30.5 per cent last year.
Saudi Arabia’s economy, the Arab world’s largest, is projected to grow 0.2 per cent in 2019, according to the Washington-based lender. The fund assumes that the average price of oil is an average of $61.78 a barrel in 2019 and $57.94 a barrel in 2020.
A recovery in the global economy “unlike the synchronised slowdown … is not broad based and is precarious,” Ms Gopinath said.
While monetary easing by central banks has supported growth, she cautioned against an environment that allows financial risks to build.
“With interest rates expected to be low for long, there is a significant risk of financial vulnerabilities growing, which makes effective macroprudential regulation imperative,” she said. “Countries should simultaneously undertake structural reforms to raise productivity, resilience, and equity… At 3 per cent growth, there is no room for policy mistakes and an urgent need for policymakers to cooperatively deescalate trade and geopolitical tensions”.
Updated: October 15, 2019 08:31 PM