Risks to global economic growth are mounting, including for the short term, amid increased tensions over trade, the IMF said on Monday in its July outlook update.
“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,” Maurice Obstfeld, director of research at the IMF, said in a blog post.
He said the IMF’s modeling suggested that if the current trade policy threats are carried out and dent business confidence, global output would be around 0.5 percent below current projections by 2020.
Last week, China warned that it would retaliate if the Trump administration imposes its threatened tariffs on US$200 billion of Chinese products, which were the U.S.’s retaliation for China’s retaliation on the U.S. imposing tariffs on US$34 billion of Chinese goods. Allies of the U.S., including the European Union, Mexico and Canada, have also begun imposing retaliatory tariffs on American goods after the Trump administration imposed tariffs steel and aluminum imports.
“As the focus of global retaliation, the United States finds a relatively high share of its exports taxed in global markets in such a broader trade conflict, and it is therefore especially vulnerable,” Obstfeld noted.
He also warned that financial markets appeared “broadly complacent,” pointing to elevated valuations and compressed spreads in many markets.
“Asset prices are no doubt buoyed, not only by easy financial conditions, but by the generally still satisfactory global growth picture. They therefore are susceptible to sudden re-pricing if growth and expected corporate profits stall,” he said.
In the July global economic outlook, the IMF said it still expected growth to reach 3.9 percent this year and next, but it noted that the picture was less synchronized.
“Among advanced economies, growth divergences between the United States on one side, and Europe and Japan on the other, are widening,” the IMF said. “Growth is also becoming more uneven among emerging market and developing economies, reflecting the combined influences of rising oil prices, higher yields in the United States, sentiment shifts following escalating trade tensions, and domestic political and policy uncertainty.”
The IMF forecast that advanced economies would grow 2.4 percent this year, down 0.1 percentage point from its April forecast, while its forecast of 2.2 percent growth in 2019 was unchanged.
Its forecast for U.S. growth remained at 2.9 percent for this year and 2.7 percent for next year. The forecast for euro area economic growth was cut by 0.2 percentage point from the April forecast to 2.2 percent for this year, and it was lowered by 0.1 percentage pint to 1.9 percent for 2019.
The forecast for Japan’s economic growth for this year was lowered by 0.2 percentage point from the April projection to 1.0 percent, while the 2019 forecast remained unchanged at 0.9 percent. The IMF also cut its projection for United Kingdom economic growth to 1.4 percent for this year, down 0.2 percentage point from its April forecast.
The IMF kept its economic growth forecast for emerging market and developing economies unchanged at 4.9 percent for this year and 5.1 percent for next year. It forecast emerging and developing Asia economies would grow 6.5 percent this year and next, while its forecast for China’s economic growth was unchanged at 6.6 percent for this year and 6.4 percent for 2019.