IMF Lowers 2019 and 2020 Global Economy Growth Outlook Amid Trade Tensions

The International Monetary Fund (IMF) has trimmed down its outlook for global economy growth for 2019 and 2020 amid continuing trade tensions between the United States and China, lingering worries related to the UK-EU Brexit deal and muted inflation across major economies. In its World Economic Outlook (WEO) report, July 2019, the organisation has lowered the global growth forecast to 3.2 per cent for 2019 and 3.5 per cent for 2020. The latest projections are 0.1 percentage point lower than the WEO projections released by the organisation in April 2019 for this year and the next year.

Factors Dampening Global Economic Growth Outlook

Ongoing US-China Trade Tensions:

The biggest risk to the global economic growth outlook comes from the ongoing trade tensions between the United States and China. According to the IMF, further escalations in trade and technology tensions between the two countries could dent business confidence and financial market sentiments as well as disturb supply chains on a global level. The organisation noted that economies should not make use of tariffs either for targeting balances in bilateral trade or as a substitute for negotiations for pressing other countries to come up with reforms.

In May 2019, the United States further hiked tariffs on certain products that it imports from China, with the Asian country retaliating by raising tariffs on certain US imports. With neither US President Donald Trump nor Chinese President Xi Jinping willing to back down, fears of a more protracted trade war between them are growing. The tariffs, which were first levied in 2018, have lowered trade between the world’s two biggest economies. Moreover, the impact can be seen on global trade volume growth, which dropped to nearly 0.5 per cent year-on-year in Q12019.

However, further escalations were averted after the June G20 summit, as the two countries agreed to restart talks regarding resolving their trade tensions and avoiding further hike in tariffs on each other’s products.

Meanwhile, the fund projected the US economic growth at 2.6 per cent in 2019, which is 0.3 percentage points higher than the figure projected in April. The US economy is projected to grow at 1.9 per cent in the next year, 2020. The China GDP growth forecast for 2019 has been lowered by 0.1 percentage point from the April projections to 6.2 per cent in 2019 and 6.0 per cent in 2020.

Continued Brexit Worries:

Another major factor threatening the global economic growth is a no-deal Brexit. The uncertainty regarding the exit of the United Kingdom from the European Union is increasing the risk to the global economy, as it could sap confidence and weaken investment.

In early April 2019, the UK and the EU agreed on extending the Brexit deadline by six months to 31 October 2019. Moreover, they agreed that in case the UK fails to hold the elections to the European Parliament, it will exit on 1 June. Additionally, it was reiterated by the European Council that withdrawal agreement negotiations would not be reopened. However, there is no clarity whether the two parties will reach a deal and maintain some economies ties.

Meanwhile, the fund projected economic growth in the United Kingdom at 1.3 per cent in 2019 and 1.4 per cent in 2020, up 0.1 percentage point from the figures projected in April 2019. The revision to 2019 growth reflects stronger-than-expected performance of the country during the first quarter of 2019.

Below-Target Inflation:

According to the International Monetary Fund, inflation remains muted, with core inflation across advanced economies such as the United States, Eurozone and Japan remaining below target. Moreover, several emerging market and developing economies witnessed core inflation below historical averages. Growing disinflationary pressures boost debt service difficulties for borrowers and compel central banks to come up with low interest rates or ease their monetary policy.

Central banks’ efforts towards bringing inflation back to the target range have been witnessed in recent times. For instance, so far in 2019, the Reserve Bank of Australia has lowered its benchmark rate twice, bringing it to 1 per cent to support the economy and reduce unemployment rate in the country.

Moreover, the US Federal Reserve is largely anticipated to lower interest rates by the end of July 2019, owing to increased uncertainties about the country’s economic outlook in recent months. In order to prevent a slowdown in the economic expansion, the US central bank is expected to soon announce the first monetary easing in more than a decade. Additionally, the European Central Bank, which holds the responsibility to set interest rates for the 19 EU member nations, is expected to announce a possible rate cut, if the economic conditions do not improve.

Factors Aiding Projected Pickup in 2020

Referring to the projected growth pickup in the next year as precarious, the IMF noted that the pickup would depend on several factors such as sentiments in financial markets remaining positive and uncertainties fading like in the Eurozone. Moreover, stabilisation in Argentina, Turkey and other emerging economies that are currently stressed, avoiding sharper collapses in Iran, Venezuela and other economies, and primarily progress towards a resolve in differences between countries related to trade policies would have a major impact on the economic growth activity on the global level during the coming years.

IMF Growth Outlook for Advanced Economies

The fund, in its World Economic Outlook, July 2019, projected growth at 1.9 per cent in 2019 and 1.7 per cent in 2020 for advanced economies across the globe. The figure is up 0.1 percentage point from the outlook released in April.

For the United States, as mentioned above, the 0.3 percentage point addition in the 2019 economy growth outlook highlights the strong performance of the country in the first quarter of the year 2019 than earlier expected. However, for next year, the US economic growth is expected to get impacted by the trade truce.

Growth in the Japanese economy is projected at 0.9 per cent in 2019 and 0.4 per cent in 2020. The fund lowered the projection for Japan for both the years by 0.1 percentage point from the April WEO. In Q12019, Japan reported inventory accumulation in addition to strong contributions from net exports due to a decline in import activities.

In the Eurozone, growth is expected to be 1.3 per cent this year and 1.6 per cent in the next year. Projections for each year are 0.1 percentage point more than the April projections. The pickup expected during the remaining part of 2019 and into 2020 would be driven by anticipated recovery in external demand and fading of some temporary factors.

IMF Growth Outlook for Emerging and Developing Economies

The IMF has revised down the growth outlook for the emerging market and developing economy group by 0.3 and 0.1 percentage points to 4.1 per cent in 2019 and 4.7 per cent in 2020, respectively, when compared with the projections released in April.

For Emerging and Developing Asia, impact of trade tensions between the United States and China is expected to hit the region’s economic growth. As a result, the fund has lowered its 2019 and 2020 forecast by 0.1 percentage point to 6.2 percent. China, the largest economy in the region, is expected to continue to feel the pressure from escalating tariffs and reducing external demand in the remaining part of the year as well as in 2020.

Growth in Latin America during 2019 is projected to be 0.8 percentage point lower than the growth projected in April to 0.6 per cent. The revised lower projections were largely driven by weaker sentiments due to uncertainty regarding pension and other structural reform approvals in Brazil, sluggish private consumption and weak investments in Mexico and contraction in the Argentine economy in Q12019. However, during the next year, the region’s economy is expected to recover to 2.3 per cent.

Economic activity is projected to grow at 1.0 per cent and nearly 3.0 per cent in 2019 and 2020, respectively, in the Middle East, North Africa, Afghanistan, and Pakistan region. Difficult outlook for the region (for which IMF lowered the 2019 projections by 0.5 percentage point) reflects impacts of tighter US sanctions on Iran and civil conflicts in Syria, Yemen and other economies.

Sub-Saharan Africa is expected to grow at 3.4 per cent and 3.6 per cent in 2019 and 2020, down 0.1 percentage point, respectively, while economic activity in emerging and developing Europe is projected at 0.2 percentage point higher to 1 per cent in 2019 and 0.5 percentage point lower to 2.3 per cent in 2020.

The IMF noted that a resolve to trade and technology tensions and uncertainties related to changes in long-standing trade agreements, along with macroeconomic policies that are key to stabilising activity and strengthening the recovery foundation are urgently needed to avert the sluggish global economic growth and lift the outlook.

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