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

The IMF has cut its world economic growth forecasts for 2019 and 2020, due to weakness in Europe and some emerging markets. It says failure to resolve trade tension could further destabilise a slowing global economy.

In its second downgrade in three months, the global lender on Monday also cited a bigger-than-expected slowdown in China’s economy and a possible “no-deal” Brexit as risks to its outlook, saying these could worsen market turbulence in financial markets.

The IMF predicted the global economy would grow at 3.5% in 2019 and 3.6% in 2020, down 0.2 and 0.1 percentage point respectively from October 2018’s forecasts.

The new forecasts, released ahead of this week’s gathering of world leaders and business executives in the Swiss ski resort of Davos, show that policymakers may need to come up with plans to deal with an end to years of solid global growth.

“Risks to global growth tilt to the downside. An escalation of trade tensions beyond those already incorporated in the forecast remains a key source of risk to the outlook,” the IMF said updating its World Economic Outlook report.

“Higher trade policy uncertainty and concerns over escalation and retaliation would lower business investment, disrupt supply chains and slow productivity growth. The resulting depressed outlook for corporate profitability could dent financial market sentiment and further dampen growth.”

The downgrades reflect signs of weakness in Europe, with its export powerhouse Germany hurt by new fuel emission standards for cars and with Italy under market pressure due to Rome’s recent budget standoff with the EU.

Eurozone growth was set to slip from 1.8% in 2018 to 1.6% in 2019, 0.3 percentage points lower than projected three months ago, the IMF said.

The IMF also cut its 2019 growth forecast for developing countries to 4.5%, down 0.2 percentage points from the previous projection and a slowdown from 4.7% in 2018.

“Emerging-market and developing economies have been tested by difficult external conditions over the past few months amid trade tensions, rising US interest rates, dollar appreciation, capital outflows, and volatile oil prices,” the IMF said.

The IMF maintained its US growth projections of 2.5% for 2019 and 1.8% in 2020, pointing to continued strength in domestic demand.

It also kept its China growth forecast at 6.2% in both 2019 and 2020, but said economic activity could miss expectations if trade tensions persist, even with state efforts to spur growth by boosting fiscal spending and bank lending.

“As seen in 2015-16, concerns about the health of China’s economy can trigger abrupt, wide-reaching sell-offs in financial and commodity markets that place its trading partners, commodity exporters, and other emerging markets under pressure,” it said.

Britain is expected to achieve 1.5% growth this year, though there is uncertainty over the projection, which is based on the assumption of an orderly exit from the EU, the IMF said.

The rare bright spot was Japan, with the IMF revising up its forecast by 0.2 percentage points to 1.1% this year due to an expected boost from the government’s spending measures, which aim to offset a scheduled sales-tax hike in October.

The IMF has been urging policymakers to carry out structural reforms while the global economy enjoys solid growth, with its MD, Christine Lagarde, telling them to “fix the roof while the sun is shining”. The IMF has stressed the need to tackle income inequality and reform the financial sector.

However, as growth momentum peaks and risks to the outlook rise, policymakers must now focus on policies to prevent further slowdowns, the IMF said.

“The main shared policy priority is for countries to resolve co-operatively and quickly their trade disagreements and the resulting policy uncertainty, rather than raising harmful barriers further and destabilising an already slowing global economy,” it said.

Reuters