IMF cuts global growth projections due to trade war

The International Monetary Fund has cut its world growth projections for 2018 and 2019 as trade tensions between the US and China start to take a bite out of the global economy.

According to their latest World Economic Outlook report released on Tuesday, the IMF says global economy is now expected to grow at 3.7% this year and the next, down 0.2% from its forecast in April.

Maurice Obstfeld, chief economist at the IMF, said earlier projections were “over-optimistic” since trade tensions have escalated since April and have started to affect global economy.

“If you have the world’s two largest economies at odds, that’s a situation in which everyone is going to suffer,” Obstfeld said.

The IMF said: “Escalating trade tensions and the potential shift away from a multilateral, rules-based trading system are key threats to the global outlook. Since the April 2018 forecast, protectionist rhetoric has increasingly turned into action, with the United States imposing tariffs on a variety of imports, including on $200bn of imports from China, and trading partners undertaking or promising retaliatory and other protective measures.

“An intensification of trade tensions, and the associated rise in policy uncertainty, could dent business and financial market sentiment, trigger financial market volatility, and slow investment and trade.”

The IMF also said that political tensions could shape economic policies and therefore affect growth. In Britain’s case, the uncertainty generated by Brexit will be the most harmful factor for the country’s economic expansion, said the IMF.

The UK’s outlook for 2019 remains at 1.5% but the April projection for a 1.3% growth rate in 2018 was cut to 1.1% after Brexit uncertainty affected heavily trade and investment in the UK and Europe.

The report also made severe cuts in the projections for emerging markets such as Argentina, Brazil, Mexico, Iran and Turkey. Although Iran is affected directly by the recently imposed US trade sanctions, Argentina and Turkey have seen their currencies crash to all-time lows against the greenback amid questions over their government’s economic policies.

The fund also cut its forecast for total good and services flow which is expected to grow by 4.2% this year and 4% next year — down 0.6% and 0.5% respectively, from earlier analysis.

Obstfeld urged governments to reject debt-fuelled spending to boost growth and cautioned against extra borrowing that could make finance ministries more vulnerable to negative shocks.

He said: “The likelihood of further negative shocks to our growth forecast has risen. In several key economies, moreover, growth is being supported by policies that seem unsustainable over the long term.”

The report echoed his view, adding: “Fiscal policy should aim to rebuild buffers for the next downturn. In countries at or close to full employment, with an excess current account deficit and an unsustainable fiscal position (notably the United States), public debt needs to be stabilised and eventually reduced."