IMF warns of rising risks to global growth as trade tensions loom

Heather Scott, Agence France-Presse

Posted at Jul 17 2018 08:39 AM

US President Donald Trump welcomes Chinese President Xi Jinping at Mar-a-Lago state in Palm Beach, Florida, US, April 6, 2017. Carlos Barria, Reuters

WASHINGTON -- The global economy is still expected to grow at a solid pace this year, but worsening trade confrontations pose serious risks to the outlook, the International Monetary Fund said Monday.

The IMF's updated World Economic Outlook forecast global growth of 3.9 percent this year and next, despite sharp downgrades to estimates for Germany, France and Japan.

The US economy is still seen growing by 2.9 percent this year and the estimate for China remains 6.6 percent, with little impact expected near term from the tariffs on tens of billions of dollars in exports the countries have imposed on each other so far.

"But the risk that current trade tensions escalate further -- with adverse effects on confidence, asset prices, and investment -- is the greatest near-term threat to global growth," IMF Chief Economist Maurice Obstfeld said.

The fund warns growth could be cut by a half point by 2020 if all the tariff threats are carried out.

Although the global recovery is in its second year, growth has "plateaued" and become less balanced, and "the risk of worse outcomes has increased," Obstfeld told reporters, and in fact the forecast for this year was revised downward, but was rounded up to 3.9 percent.

How the risks will play out are difficult to determine at this point.

ADDRESSING 'DISENCHANTMENT'

The report comes as US President Donald Trump has imposed steep tariffs duties on $34 billion in imports from China, with another $200 billion coming as soon as September, on top of duties on steel and aluminum from around the world including key allies. He also has threatened to impose border taxes on autos.

China has matched US tariffs dollar-for-dollar and threatened to take other steps to retaliate, while US exports face retaliatory border taxes from Canada, Mexico and the European Union.

So far the exports hit do not have much impact on economic growth but further steps "and countermeasures and counter-countermeasures if implemented would have a bigger cost," Obstfeld said.

The impact is not just in terms of prices but the damage to business and financial market sentiment, which would lead to a "negative shock to investment."

The IMF said growth prospects were below average in many countries and urged governments to take steps to ensure economic growth will continue and to protect vulnerable populations.

"Governments must also pay more attention to economic equity among citizens and especially protecting the poorest," Obstfeld said.

Global cooperation and a "rule-based trade system has a vital role to play in preserving the global expansion."

However, the report said that without steps to "ensure the benefits are shared by all, disenchantment with existing economic arrangements could well fuel further support for growth-detracting inward-looking policies."

EUROPE, JAPAN SLOWING

The sweeping US tax cuts approved in December will help the economy "strengthen temporarily" but growth is expected to moderate to 2.7 percent for 2019.

And while the fiscal stimulus will boost US demand, it also will increase inflationary pressures, the WEO warned.

China's growth also is seen slowing in 2019 to 6.4 percent.

After upgrading growth projections for the euro area in the April WEO, the IMF revised them down by two-tenths in 2018 to 2.2 percent, due to "negative surprises to activity in early 2018," and another tenth in 2019 to 1.9 percent.

Amid rising oil prices and a worsening export outlook, the estimates for Germany, France and Italy were cut by 0.3 points each, with Germany seen expanding by 2.2 percent this year and 2.1 percent in 2019. France's GDP is expected to grow 1.8 percent and 1.7 percent.

Meanwhile, Britain is now expected to grow by 1.4 percent this year, 0.2 points lower than the April estimate, and by 1.5 percent in 2019.

Japan's GDP is seen slowing to 1.0 percent this year, two-tenths less than previously forecast, "following a contraction in the first quarter, owing to weak private consumption and investment." It should grow 0.9 percent the following year.

India remains a key driver of global growth but the GDP outlook there was cut one tenth for this year and three tenths for next year to 7.3 percent and 7.5 percent respectively.

Brazil saw an even sharper 0.5-point downward revisions from the April forecast, to 1.8 percent this year.

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