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IMF Lowers Estimate of Prospects for Global Growth

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USA - January 23, 2019

The International Monetary Fund has cut its global economic growth forecasts for 2019 and 2020 due to problems in Europe and some emerging markets. The IMF said that failure to resolve trade tensions could further destabilize the slowdown in the world economy.

In the second downturn in three months, the global lender also cited a more severe than expected slowdown in China's economy and a possible "invalid" Brexit as major risks, saying it could increase turbulence in financial markets.

The IMF expected global economic growth of 3.5% in 2019 and 3.6% in 2020, which is 0.2% and 0.1% respectively lower than last October's forecasts.

New forecasts published ahead of the meeting of world leaders and CEOs in Davos show that politicians may have to come up with plans for the end of perennial 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," says the IMF in its updated World Economic Outlook report.

IMF Lowers Estimate of Prospects for Global Growth

Beyond the possibility of escalating trade tensions and a broader turn in financial market sentiment, other factors adding downside risk to global investment and growth include uncertainty about the policy agenda of new administrations, a protracted US federal government shutdown, as well as geopolitical tensions in the Middle East and East Asia. Risks of a somewhat slower-moving nature include pervasive effects of climate change and ongoing declines in trust of established institutions and political parties.

"Increased trade policy uncertainty and fears of escalation and response will lead to lower business investment, disrupted supply chains and slower productivity growth. As a result of the deterioration of corporate profitability prospects may affect the mood in the financial markets and further weaken economic growth,” the report notes.

The downgrade reflected signs of Europe's weakness: Its export power station, Germany, suffered from new standards for car fuel emissions, and Italy, under market pressure due to Rome's recent confrontation with the European Union.

The IMF said that the growth rate in the Eurozone will be moderate: from 1.8% in 2018 to 1.6% in 2019, which is 0.3% lower than expected three months ago.

The IMF maintained its growth forecasts for the US at 2.5% this year and 1.8% in 2020, pointing to continued growth in domestic demand.

The Fund also maintained its forecast for growth in China at 6.2% in both 2019 and 2020 but noted that economic activity may not meet expectations if trade tensions persist, despite the government's efforts to stimulate growth through increased budget spending and bank lending.

"As can be seen from 2015-16, concern about the health of the Chinese economy can provoke sharp large -- scale sales in the financial and commodity markets, which creates pressure on its trading partners, exporters of raw materials and other emerging markets," the IMF said.

The baseline forecast incorporates the US tariffs announced through September 2018 and retaliatory measures. For the United States, these include tariffs on solar panels, washing machines, aluminum, and steel announced in the first half of 2018; a 25% tariff on $50 billion worth of imports from China, and a 10% tariff on an additional $200 billion of imports from China, with the latter rising to 25% after the current 90-day "truce" ends on March 1, 2019. For China, the forecast incorporates tariffs ranging from 5 to 10% on $60 billion of imports from the United States.

Average oil prices are projected at just below $60 per barrel in 2019 and 2020 (down from about $69 and $66, respectively, in the last WEO). Metals prices are expected to decrease 7.4% year-over-year in 2019 (a deeper decline than anticipated last October) and to remain roughly unchanged in 2020. Price forecasts for most major agricultural commodities have been revised modestly downwards.

The UK is expected to achieve 1.5% growth this year, although there is uncertainty about the forecast based on the assumption of an orderly exit from the EU, the IMF said.

A rare bright spot was Japan: The IMF revised its forecast by 0.2% to 1.1% this year due to the expected increase in government spending measures, which are aimed at compensating for the planned increase in sales tax in October.

IMF Lowers Estimate of Prospects for Global Growth

For the emerging market and developing economy group, growth is expected to tick down to 4.5% in 2019 (from 4.6% in 2018), before improving to 4.9% in 2020. The projection for 2019 is 0.2 percentage points lower than in the October 2018 WEO.

The IMF is calling on policymakers to undertake structural reforms while the global economy is growing steadily, and its Managing Director, Christine Lagarde, has encouraged them to "fix the roof while the sun is shining." The IMF stresses the need to address income inequality and reform the financial sector.

However, as the peaks of the growth momentum and risks to the forecast increase, policymakers should now focus on policies to prevent further slowdown, the Fund stressed.

"The main priority of the General policy is that countries jointly and promptly resolve their trade disagreements and the resulting political uncertainty without raising distortive trade barriers further and market sentiment recovers, and not increase harmful barriers and destabilize the already slowing global economy," the IMF said.

Author: USA Really