IMF Cuts Outlook for Global Growth

Trade war with China contributes to downgrade for US forecast.

Global trade barriers and weaker-than-expected activity in both advanced and emerging economies have led the International Monetary Fund (IMF) to lower its global growth forecasts from six months ago.  The IMF now expects global growth of 3.7% for 2018 and 2019, down from the 3.9% it forecast in April.

The IMF said that several of the downside risks cited in its April World Economic Outlook, such as rising trade barriers and a reversal of capital flows to emerging market economies, have become more pronounced, or have partially materialized. At the same time, it said the potential for upside surprises has receded due to the tightening of financial conditions in some parts of the world, higher trade costs, slow implementation of reforms, and waning growth momentum.

“There are clouds on the horizon,” said Maurice Obstfeld, the IMF’s director of research, at a press conference announcing the results of its most recent World Economic Outlook. “Growth has proven to be less balanced than we had hoped. Not only have some downside risks that the last WEO identified been realized, the likelihood of further negative shocks to our growth forecast has risen.”

The IMF’s 2018 growth forecast for the US was unchanged from the April projections at 2.9% but was lowered for 2019 to 2.5% from 2.7%. Growth for emerging market and developing economies was cut to 4.7% for both 2018 and 2019, down from April’s forecast of 4.9% and 5.1%, respectively. The IMF also lowered growth forecasts for the euro area to 2.0% and 1.9% for 2018 and 2019, respectively, down from its April forecast of 2.4% and 2.0%.

“Among advanced economies, growth disappointed in the euro area and the United Kingdom,” said the IMF in its outlook. “Slower export growth after a strong surge in the final quarter of 2017 contributed notably to the euro area slowdown.”

The IMF also said its downward revision reflected surprises that suppressed activity in early 2018 in some major advanced economies, the negative effects of trade measures, and a weaker outlook for some key emerging market and developing economies.

“Growth in the United States, buoyed by a pro‑cyclical fiscal package, continues at a robust pace and is driving US interest rates higher, but US growth will decline once parts of its fiscal stimulus go into reverse,” said the IMF. “We have downgraded its 2019 growth forecast, owing to the recently enacted tariffs on a wide range of imports from China and China’s retaliation.”

The IMF also lowered its expected growth for China in 2019, saying that its domestic policies are likely to prevent an even larger growth decline than the one the IMF projects, but that it will come at the cost of prolonging internal financial imbalances.

Compared with six months ago, the IMF’s projected 2018‑2019 growth in advanced economies is 0.1 percentage point lower, while downward revisions for emerging market and developing economies were steeper at 0.2 and 0.4 percentage points, respectively, for 2018 and 2019.

“While financial market conditions remain accommodative in advanced economies, they could tighten rapidly if trade tensions and policy uncertainty intensify,” said the IMF, “or unexpectedly high inflation in the United States triggers a stronger-than-anticipated monetary policy response.”

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