A security official stands in the lobby of the International Monetary Fund headquarters in Washington, the US, on Wednesday. Picture: REUTERS/YURI GRIPAS
A security official stands in the lobby of the International Monetary Fund headquarters in Washington, the US, on Wednesday. Picture: REUTERS/YURI GRIPAS

Washington - The IMF says the world economy is plateauing as the lender cut its growth forecast for the first time in more than two years, blaming escalating trade tensions and stresses in emerging markets.

On the eve of its annual meetings in Bali, Indonesia, the fund on Tuesday projected a global expansion of 3.7% in 2018 and 2019, down from the 3.9% projected three months ago. It was the first downgrade since July 2016.

While the global economy is still on track to match 2017’s pace, which was the strongest since 2011, the new outlook suggests fatigue is setting in and the overall performance masked divergence with mounting weakness in emerging markets from Brazil to Turkey.

The fund left its 2018 US forecast unchanged but cut its expectation for 2019, citing the impact of the trade conflict.

Risks to the global outlook have risen in the last three months and tilt to the downside, the IMF said. Threats include a further inflaming of the trade war between the US and countries including China, and a sharper-than-expected rise in interest rates, which would accelerate capital flight from emerging markets.

"There are clouds on the horizon. Growth has proven to be less balanced than we had hoped," IMF chief economist Maurice Obstfeld told reporters on Tuesday in Bali. "Not only have some downside risks we identified in the last WEO [World Economic Outlook survey] been realised, the likelihood of further negative shocks to our growth forecast has risen."

The warning comes as finance ministers and central bankers from the IMF’s 189 member nations prepare to meet this week in Bali for the annual meetings of the fund and the World Bank. The Trump administration’s trade dispute with China is expected to be front and centre, as are the consequences of the Federal Reserve and other major central banks tightening monetary conditions after a decade of easy money. If the trade war continues, it could take a significant bite out of global growth, according to the fund. It estimates global output could fall by more than 0.8% in 2020 and remain 0.4% below its trend line over the long term, in a scenario where Trump follows through on all his threats. Output could fall by more than 1.6% in China and over 0.9% in the US in 2019, according to the IMF’s models.

The IMF’s cut to its outlook was broad-based. It downgraded its forecast for US growth in 2019 to 2.5%, down 0.2 percentage points from July, after factoring in the impact of tariffs imposed by the Trump administration and retaliatory duties by other nations. It left its 2019 US growth projection at 2.9%.

President Donald Trump has slapped tariffs on $250bn in Chinese goods in 2018, and Beijing has retaliated with levies on $110bn of US products.

The IMF projections do not include Trump’s threat to expand the tariffs to effectively all of the more than $500bn in goods the US bought from China in 2017. The IMF also cut its outlook for China as a result of the tariffs, shaving its projection for growth in 2019 to 6.2%, down 0.2 percentage points from three months ago.

The euro area will expand 2% in 2018, down 0.2 points from July, as a result of weaker-than-expected growth in the first half of the year.

The fund upgraded its forecast for Japan slightly to 1.1% growth in 2018. Several emerging markets had their forecasts cut, including Argentina, Brazil, Iran and Turkey.

The IMF said it expects inflation to accelerate around the world in 2018, due largely to increasing commodity prices. Core inflation, which excludes volatile items such as energy, will vary from country to country, it said.

In the US, the core personal consumption expenditure index, the Fed’s preferred measure for inflation, will rise to 2.1% in 2018 and 2.3% in 2019, as the government’s fiscal stimulus pushes growth above potential.

Over the longer term, the IMF sees ageing populations and sluggish productivity growth as a major challenge to advanced economies. Global growth will slow to 3.6% by 2022-2023, it said.

Bloomberg