IMF Downgrades Outlook for World Economy, Citing Ongoing Trade Wars

October 15, 2019 by Dan McCue
IMF Downgrades Outlook for World Economy, Citing Ongoing Trade Wars
IMF Chief Economist Gita Gopinath.

WASHINGTON — The International Monetary Fund on Tuesday downgraded its outlook for the world economy, predicting that growth in the developed world this year, stymied by trade conflicts, will be the weakest since the 2008 financial crisis.

During a press conference Tuesday morning, IMF Chief Economist Gita Gopinath said the global economy is in a “synchronized” slowdown and is currently experiencing “a serious climbdown” from the 3.8 percent growth experienced in 2017.

The fund, an international organization comprised of 189 member countries, works to foster global financial and business cooperation and sustainable economic growth.

Gopinath said the IMF currently expects the global economy to grow by about 3 percent this year, down 0.2 percentage point from its previous forecast in July and sharply below the 3.6% growth of 2018.

For the United States this year, the IMF projects a modest 2.4% gain, down from 2.9% in 2018.

The IMF’s latest World Economic Outlook, released at the start of fall meetings of the 189-nation IMF and its sister lending organization, the World Bank, does foresee a slight rebound in 2020, “however, unlike the synchronized slowdown, this recovery is not broad based and is precarious,” Gopinath said.

In a forward Gopinath wrote for the outlook report, the economists says the situation is a consequence of “rising trade barriers, elevated uncertainty surrounding trade and geopolitics, macroeconomic strains in several emerging market economies, and structural factors, such as low productivity growth and aging demographics in advanced economies.

Of the modest uptick the IMF says is coming in 2020, “about half” will be driven by “recoveries or shallower recessions in stressed emerging markets, such as Turkey, Argentina, and Iran, and the rest by recoveries in countries where growth slowed significantly in 2019, relative to 2018, such as Brazil, Mexico, India, Russia, and Saudi Arabia,” the report says.

The new forecast predicts global growth of 3% this year, Next year, the fund foresees a rebound for the world economy to 3.4% growth but a further slowdown in the United States to 2.1%, far below the 3% growth the Trump administration projects.

But Gopinath and her fellow economists caution these slight gains might not be realized.

“With a synchronized slowdown and uncertain recovery, the global outlook remains precarious,” Gopinath said in the report. “At 3% growth, there is no room for policy mistakes and an urgent need for policymakers to cooperatively deescalate trade and geopolitical tensions.

“Besides supporting growth, such actions can also help catalyze needed cooperative solutions to improve the global trading system. Moreover, it is essential that countries continue to work together to address major issues, such as climate change, international taxation, corruption, and cybersecurity,” she wrote.

The release of the annual global outlook report comes at a precarious, unpredictable moment in the world economy.

Last week, the United States and China reached a temporary cease-fire in their trade fight when President Donald Trump agreed to suspend a tariff hike on $250 billion of Chinese products that was to take effect this week.

But no formal agreement has been reached and many issues between the two enormous economies remain to be resolved.

And on Monday, days after appearing to acquiesce to a Turkish invasion of northern Syria aimed at routing the United States’ longtime Kurdish allies, the White House reversed course, imposing economic sanctions.

In an executive order signed Monday, President Donald Trump declared that Turkey’s offensive “undermines the campaign to defeat the Islamic State of Iraq and Syria, or ISIS, endangers civilians, and further threatens to undermine the peace, security, and stability in the region.”

The order halts a $100 billion trade deal being hammered out between Ankara and Washington, raises tariffs on Turkish steel to 50% and imposes sanctions on senior Turkish officials and the country’s defense and energy ministries.

In addition to trade and geopolitical risks, the IMF envisions threats arising from a potentially disruptive exit by Britain from the European Union at the end of the month.

The Fund urged policymakers to intensify their efforts to avoid economically damaging mistakes.

“As policy priorities go, undoing the trade barriers put in place with durable agreements and reining in geopolitical tensions top the list,” Gopinath wrote in the report. “Such actions can significantly boost confidence, rejuvenate investment, halt the slide in trade and manufacturing, and raise world growth.

“In its absence, and to fend off other risks to growth and raise potential output, economic activity should be supported in a more balanced manner. Monetary policy cannot be the only game in town and should be coupled with fiscal support where fiscal space is available and where policy is not already too expansionary,” she added.

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