The International Monetary Fund on Monday cut its world economic growth forecasts for 2019 and 2020, due to weakness in Europe and some emerging markets, and said failure to resolve trade tensions could further destabilise a slowing global economy.
In its second downgrade in three months, the global lender also cited a bigger-than-expected slowdown in Chinaโs economy and a possible โNo Dealโ Brexit as risks to its outlook, saying these could worsen market turbulence in financial markets.
The IMF predicted the global economy to grow at 3.5 per cent in 2019 and 3.6 per cent in 2020, down 0.2 and 0.1 percentage point respectively from last Octoberโs forecasts.
The new forecasts, released ahead of this weekโs 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.
โRisks 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,โ the IMF said in an update to its World Economic Outlook report.
โHigher 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.โ
The downgrades reflected 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 Romeโs recent budget standoff with the European Union.
Growth in the euro zone is set to moderate from 1.8 per cent in 2018 to 1.6 per cent in 2019, 0.3 percentage point lower than projected three months ago, the IMF said.
The IMF also cut its 2019 growth forecast for developing countries to 4.5 per cent, down 0.2 per centage point from the previous projection and a slowdown from 4.7 per cent in 2018.
โEmerging market and developing economies have been tested by difficult external conditions over the past few months amid trade tensions, rising U.S. interest rates, dollar appreciation, capital outflows, and volatile oil prices,โ the IMF said.
The IMF maintained its U.S. growth projections of 2.5 per cent this year and 1.8 per cent in 2020, pointing to continued strength in domestic demand.
It also kept its China growth forecast at 6.2 per cent 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.
โAs seen in 2015โ16, concerns about the health of Chinaโs 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,โ it said.
Britain is expected to achieve 1.5 per cent 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 point to 1.1 per cent this year due to an expected boost from the governmentโs 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 managing director, Christine Lagarde, telling them to โfix the roof while the sun is shiningโ. The IMF has stressed the need to address 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.
โThe main shared policy priority is for countries to resolve cooperatively and quickly their trade disagreements and the resulting policy uncertainty, rather than raising harmful barriers further and destabilizing an already slowing global economy,โ it added.
