The International Monetary Fund (IMF) has warned that US trade tariffs and an escalation in trade tensions pose a risk to global economic growth in 2018 and 2019.
“The recently announced and anticipated tariff increases by the United States and retaliatory measures by trading partners have increased the likelihood of escalating and sustained trade actions,” said the IMF in its July World Economic Outlook. “These could derail the recovery and depress medium-term growth prospects, both through their direct impact on resource allocation and productivity, and by raising uncertainty and taking a toll on investment.”
The IMF projects global growth to reach 3.9% in 2018 and 2019, but said the outlook is clouded by ongoing trade tensions and waning support for global economic integration in some advanced economies.
“An escalation of trade tensions could undermine business and financial market sentiment, denting investment and trade,” said the IMF. “The proliferation of trade measures could increase the uncertainty about the potential breadth of trade actions, thus hindering investment, while higher trade barriers would make tradable goods less affordable, disrupt global supply chains, and slow the spread of new technologies, thus lowering productivity.”
The report said that near-term momentum in the US is strengthening in line with its April forecast, with growth projected at 2.9% and 2.7% for 2018 and 2019, respectively.
“Substantial fiscal stimulus together with already-robust private final demand will lift output further above potential,” said the report, “and lower the unemployment rate below levels last registered 50 years ago, creating additional inflationary pressures.”
Meanwhile, growth in the euro area economy is projected to gradually slow to 2.2% in 2018 and to 1.9% in 2019, from 2.4% in 2017. Forecasts for 2018 growth have been revised down for Germany and France after activity softened more than expected in the first quarter, and in Italy, where tighter financial conditions in the wake of recent political uncertainty are expected to burden domestic demand, said the report.
Among emerging market and developing economies, the IMF said growth prospects are becoming more uneven amid rising oil prices, rising trade tensions, and market pressures on the currencies of some economies with weaker fundamentals. Growth projections have been revised down for Argentina, Brazil, and India, while the outlook for some oil-exporting countries has improved.
The report also said that while the financial market conditions remain accommodative for advanced economies, this could change rapidly. Possible triggers include rising trade tensions and conflicts, geopolitical concerns, and mounting political uncertainty.
“Avoiding protectionist measures and finding a cooperative solution that promotes continued growth in goods and services trade remain essential to preserve the global expansion,” said the IMF. “Policies and reforms should aim at sustaining activity, raising medium-term growth, and enhancing its inclusiveness.”