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IMF Sees Global Economy Stabilizing But Sluggish in Wake of US/China Trade War

January 21, 2020 by Dan McCue
IMF Chief Economist Gita Gopinath on Reuters' Davos Today program, Tuesday, January 21. (Screen grab)

WASHINGTON – The International Monetary Fund has trimmed its forecast for global economic growth this year, saying that while some positive things have happened in recent weeks, including the completion of Phase I of a U.S.-China trade deal, the prospects for a full recovery are still uncertain.

In a report released ahead of the World Economic Forum in Davos, Switzerland, IMF chief economist Gita Gopinath said the organization now projects global growth will increase modestly to 3.3% in 2020 and 3.4% in 2021.

These figures are only slightly better than the 2.9% achieved in 2019, the worst year for the global economy since the financial crisis more than a decade ago, but they are an improvement over the IMF’s most recent assessment.

Gopinath attributed this in part to the U.S./China deal announced last week, and to a lower likelihood of a no-deal Brexit.

But she also warned the global economy continues to face an array of risks, including the possibility that trade tensions will escalate again.

And despite the modest global upturn, the IMF foresees the growth of the U.S. economy slowing from 2.3% in 2019, to 2.0% in 2020 and 1.7% in 2021.

The organization, which works to foster global monetary cooperation, said the decline in U.S. growth is largely attributable to the fading benefits from the 2017 tax cuts.

China’s economy will also continue to decelerate, the IMF predicts — from 6.1% last year to 6% in 2020 and 5.8% next year.

Though China’s economy will likely benefit from the truce with the United States, Beijing continues to manage a difficult transition away from speedy economic growth based on often-wasteful and debt-fueled investments to slow but steady growth built on spending by the country’s growing middle class.

Likewise, Japan’s economic growth, hobbled by an aging workforce, is expected to decelerate from 1% last year to 0.7% this year to 0.5% next year.

But weighing most of all on the IMF assessment is a steep slowdown in India.

The world’s seventh-biggest economy is expected to grow 5.8% this year, down from the 7% the IMF had expected in October, and 6.5% in 2021, down from a previously forecast 7.4%.

Noting that, until recently, India was the world’s fastest growing major economy, Gopinath said momentum has been stalled by increased stress in the financial sector, sluggish demand in rural areas and weak activity in lending.

“There is simply no room for complacency, and the world needs stronger multilateral co-operation and national-level policies to support a sustained recovery that benefits all,” she said.

Separately, the PwC annual survey of chief executives, released Monday, revealed concerns about the global economic backdrop, with corporate leaders saying their own companies’ prospects were under more pressure than at any time in 11 years.

More than half of the almost 1,600 chief executives from 83 countries that participated in the survey forecast a decline in the rate of economic growth in 2020, up from 29% in last year’s survey and only 5% in 2018.

Gopinath also called for countries to prepare for a worse global economy by devising contingency measures of tax cuts or public spending increases to be implemented if growth falls short of expectations.

“It might be useful to think now of some cyclical fiscal rules that, if and when things go worse, the response in terms of [public] spending is more automatic than it was the last time round,” she said.

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