Nick Beams
The International Monetary Fund has cut its forecast for global growth this year to its lowest level since the global financial crisis and recession of 2008-2009 and warned that deepening trade conflicts make the outlook “precarious.”
Apart from the headline numbers in the World Economic Outlook report issued on Tuesday, the most significant aspect of the IMF’s update on the state of the world economy was its forecast on continuing low growth in four key sectors.
It found that the global “big four”—the US, China, Japan and the eurozone—would not see any improvement in their growth rates over the next five years.
The IMF predicted the world economy would grow by only 3 percent this year, down from 3.6 percent in 2018 and 0.3 percent below the forecast at its April meeting.
The Global Financial Stability Report issued on Wednesday added to the darkening outlook. It warned that continuing low interest rates were leading investors to take greater risks in an effort to maintain their returns on capital, and that could have an adverse impact on the broader economy.
“The search for yield among institutional investors—such as insurance companies, asset managers and pension funds—has led them to take on riskier and less-liquid securities,” Tobias Adrian, the IMF’s financial counsellor said. “These exposures may act as an amplifier of shocks.”
The low-interest rate regime was supporting the economy at present, but was putting growth at risk in the medium term.
The IMF’s WEO report said global growth was expected to rise to 3.4 percent in 2020—a downward revision of 0.2 percentage points from its forecast last April. But it warned that even this limited projected upturn, unlike the “synchronised slowdown,” was “not broad based and is precarious.”
Growth for the advanced economies is projected to slow to 1.7 percent in 2019 and 2020. If a global pickup does take place, it will be as a result of expansion in emerging market economies. More than half of this would be driven by “recoveries or shallower recessions in stressed emerging markets, such as Turkey, Argentina and Iran.” In other words, the projected recovery rests on very shaky foundations, given the ongoing slowdown in the major economies.
The report itself acknowledged that the risks to its baseline outlook were “significant.” It warned that “should stress fail to dissipate in a few key emerging market and developing economies that are currently under performing or experiencing severe strains, global growth in 2020 would fall well short of the baseline.”
Further escalation of trade tensions and policy uncertainty could further weaken growth. Financial market sentiment could also deteriorate, resulting in tighter financial conditions that would impact heavily on vulnerable economies.
“Possible triggers for such an episode include worsening trade and geopolitical tensions, a no-deal Brexit withdrawal … and persistently weak economic data pointing to a protracted slowdown in global growth,” it stated.
For the US, the IMF expects the economy to slow from 2.4 percent growth this year to 2.1 percent in the election year of 2020—well below the Trump administration’s target of growth of 3 percent or more.
Largely as a result of the weakness in the German economy, economic growth in the eurozone is expected be only 1.2 percent this year, rising to 1.4 percent in 2020.
The growth rate of the Chinese economy is also forecast to slow. The IMF predicts that it will fall from 6.1 percent in 2019 to 5.5 percent in 2024, with the forecast for this year 0.2 percent lower than the prediction in April.
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