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IMF Cuts Global Growth Forecasts for 2018 and 2019

Factors include trade rift, policy uncertainty, instability in emerging markets.

The International Monetary Fund (IMF) shaved its forecast for global economic growth this year and next, noting that downside risks to global growth have risen in the past six months and the potential for upside surprises has receded.

The IMF now forecasts that the global economy will expand at 3.7% this year and next, down from the 3.9% rate of annualized growth it had forecast this past April. In a blog post accompanying its latest World Economic Outlook released in early October, the fund’s research director says clouds are on the horizon.

“Growth has proven to be less balanced than hoped. Not only have some downside risks that the last WEO [World Economic Outlook] identified been realized, the likelihood of further negative shocks to our growth forecast has risen,” Maurice Obstfeld, the IMF’s economic counselor and director of its research department, wrote in the blog post. “In several key economies, moreover, growth is being supported by policies that seem unsustainable over the long term. These concerns raise the urgency for policymakers to act.”1

At the global level, recent data show weakening in trade, manufacturing and investment, Obstfeld said in the forward to the latest World Economic Outlook. “Overall, world economic growth is still solid compared with earlier this decade, but it appears to have plateaued.”2

Trade Woes to Weigh on Growth

Among the drivers of what’s ahead for the global economy, the trade battle between the U.S. and China, the world’s two largest economies, will likely take its toll on each nation’s domestic economy as well as global trade. That led the IMF to downgrade its 2019 forecasts for both countries. Recent turmoil in emerging markets is another factor weighing on global growth and could also impact the economies of developed countries, the IMF said.

For the U.S. the fund projects the economy will grow 2.9% this year, unchanged from its earlier forecasts. For 2019, though, it forecasts a 2.5% pace of annualized growth, down from 2.7% in its April and July forecasts. While growth in the U.S. has been “buoyed by a pro-cyclical fiscal package,” and continues at a robust pace driving interest rates higher, growth will decline “once parts of its fiscal stimulus go into reverse,” Obstfeld wrote in the blog.

And notwithstanding the present demand momentum, “we have downgraded our 2019 US growth forecast owing to the recently enacted tariffs on a wide range of imports from China and China’s retaliation,” he wrote.

China’s economy is forecast to grow 6.6% this year, unchanged from previous estimates, and 6.2% in 2019, down from 6.4% in the IMF’s April and July forecasts. “Domestic Chinese policies are likely to prevent an even larger growth decline than the one we project, but at the cost of prolonging internal financial imbalances,” Obstfeld wrote.

On October 8, China’s central bank announced that it would lower the reserve requirement ratio, or RRR, that commercial banks must set aside with the central bank. The country’s central bank uses the RRR to curtail or increase liquidity in the domestic economy as needed.

With the just announced 100-basis-point cut in the RRR that’s set to go into effect October 15, China’s central bank will have lowered the RRR four times this year. It’s estimated the central bank’s most recent action will inject more than $109.0 billion into the Chinese economy.

Debt has been fueling the Chinese economy in recent years which was followed by government-led initiatives to reign in credit growth and bank leverage. But the threat of a prolonged trade spat with the U.S. has led the central bank to lower the RRR beyond what may have been a way to smooth the deleveraging process earlier in the year and ease credit to banks that might have been experiencing a credit crunch, Cindy Ponder-Budd, an analyst from research firm View from the Peak, explained in this CNBC article.

“Economic growth in China is slowing and you’re starting to see the government more proactive in terms of trying to provide stimulus,” she told CNBC’s “Squawk Box.”3

In addition to the trade battle between the U.S. and China, other countries have also responded to trade measures and tariffs introduced earlier this year by the U.S. That has, in part, resulted in declining world trade – or the volume of goods and services as measured by imports and exports.

After rising by 5.2% in 2017, the best year since the economic rebound in 2010 and 2011 following the global financial crisis, trade is expected to grow 4.2%, down from the IMF’s projection in April of 5.1%. World trade is forecast to slow further in 2019 at 4.0%, down from expectations of 4.7% in April.

The Eurozone economy, meanwhile, is forecast to grow 2.0% this year, down from a 2.2% forecast the IMF published in its July WEO Update, and 1.9% in 2019. Global growth for emerging market and developing economies was also lowered to 4.7% for this year and in 2019, down from July’s updates of 4.9% and 5.1%, respectively, for 2018 and 2019.

Tighter monetary policy in the U.S., trade uncertainties, and distinctive factors within the economies of Argentina, Brazil, South Africa and Turkey, have discouraged capital inflows, weakened currencies, depressed equity markets, and pressured interest rates and spreads, Obstfeld wrote in the blog.

Many emerging economies are managing “relatively well—given the common tightening they face—using established monetary frameworks based on exchange rate flexibility,” he wrote.

“But there is no denying that the susceptibility to large global shocks has risen. Any sharp reversal for emerging markets would pose a significant threat to advanced economies, as emerging market and developing economies make up about 40 percent of world GDP at market exchange rates.”

 

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Sources:

1 Obstfeld, Maurice. (2018, October 9) Global Growth Plateaus as Economic Risks Materialize. IMF Blog. Retrieved from: https://blogs.imf.org/2018/10/08/global-growth-plateaus-as-economic-risks-materialize/

2 World Economic Outlook (2018, October) Challenges to Steady Growth. International Monetary Fund. Retrieved from:  https://www.imf.org/~/media/Files/Publications/WEO/2018/October/English/main-report/Text.ashx?la=en

3 Lee, Y. (2018, October 8) China says it’s not afraid of a trade war with the US — its actions show otherwise. CNBC. Retrieved from: https://www.cnbc.com/2018/10/08/us-china-trade-war-central-bank-pboc-cuts-banks-rrr-to-save-economy.html

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