Breaking News
Get 40% Off 0
👀 Reveal Warren Buffett's stock picks that are beating the S&P 500 by +174.3% Get 40% Off

IMF cuts world economic growth forecasts on tariff war, emerging market strains

Published Oct 09, 2018 05:09AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
© Reuters. Maurice Obstfeld, Economic Counsellor and Director of IMF (R) reacts as Gian Maria Milesi-Ferretti, Deputy Director Research Department of IMF speaks during their press conference at the 2018 IMF World Bank Group Annual Meeting

By David Lawder

NUSA DUA, Indonesia (Reuters) - The International Monetary Fund on Tuesday cut its global economic growth forecasts for 2018 and 2019, saying that the U.S-China trade war was taking a toll and emerging markets were struggling with tighter liquidity and capital outflows.

The new forecasts, released on the Indonesian resort island of Bali where the IMF and World Bank annual meetings are getting underway, show that a burst of strong growth, fueled partly by U.S. tax cuts and rising demand for imports, was starting to wane.

The IMF said in an update to its World Economic Outlook it was now predicting 3.7 percent global growth in both 2018 and 2019, down from its July forecast of 3.9 percent growth for both years.

The downgrade reflects a confluence of factors, including the introduction of import tariffs between the United States and China, weaker performances by eurozone countries, Britain and Japan, and rising interest rates that are pressuring some emerging markets with capital outflows, notably Argentina, Brazil, Turkey, South Africa, Indonesia and Mexico.

"U.S. growth will decline once parts of its fiscal stimulus go into reverse," IMF chief economist Maurice Obstfeld said in a statement. "Notwithstanding the present demand momentum, we have downgraded our 2019 U.S. growth forecast owing to the recently enacted tariffs on a wide range of imports from China and China’s retaliation."

With much of the U.S.-China tariff war's impact to be felt next year, the Fund cut its 2019 U.S. growth forecast to 2.5 percent from 2.7 percent previously, while it cut China's 2019 growth forecast to 6.2 percent from 6.4 percent. It left 2018 growth forecasts for the two countries unchanged at 2.9 percent for the United States and 6.6 percent for China.

Obstfeld said he was not concerned about the Chinese government's ability to defend its currency against further weakening but told a news conference that Beijing would face a "balancing act" between actions to shore up growth and ensuring financial stability.

If China and the United States were to resolve their trade differences, it "would be a significant upside to the forecast."

The eurozone's 2018 growth forecast was cut to 2.0 percent from 2.2 percent previously, with Germany particularly hard hit by a drop in manufacturing orders and trade volumes.

Obstfeld said the IMF does not see a generalized pullback from emerging markets, nor contagion that will spill over to those emerging economies which have stronger economies and have thus far avoided major outflows, such as some in Asia and some oil and metals exporting countries.

"But there is no denying that the susceptibility to large global shocks has risen," Obstfeld said. "Any sharp reversal for emerging markets would pose a significant threat to advanced economies."

Brazil will see a 0.4 percentage-point drop in GDP growth to 1.4 percent for 2018 as a nationwide truckers strike paralyzed much of the economy. Iran, facing a new round of U.S. sanctions next month, also saw its growth forecast cut, the IMF said.

Some energy-rich emerging market countries have fared better due to higher oil prices, with Saudi Arabia and Russia receiving upgrades to growth forecasts.

The IMF said the balance of risks was now tilted to the downside, with a higher likelihood that financial conditions will tighten further as interest rates normalize, hurting emerging markets further at a time when U.S.-led demand growth will start to slow as some tax cuts expire.

Trade tensions are expected to continue although Fund officials view U.S.-Mexico-Canada trade agreement as a positive sign.

"Where we are now is we’ve gotten some bad news. Our probability that we would attach to further bad news has gone up," Obstfeld said.

TRADE WAR RISKS

In a new simulation exercise to show trade war risks to the global economy, the IMF modeled the effect of an all-out U.S.-China trade war, coupled with threatened global U.S. automotive tariffs and retaliation from trading partners.

The model also includes the effects of a reduction in business confidence that reduces investment and leads to a tightening of financial conditions.

It found that global GDP output under this scenario would fall by more than 0.8 percent in 2020 and remain roughly 0.4 percent lower in the long-term compared to levels without the effects of a trade war.

The repercussions for the United States and China would be particularly severe, with 2019 GDP losses of more than 0.9 percent in the United States and 1.6 percent in China in 2019.

The exercise assumes that U.S. President Donald Trump imposes tariffs on the remaining $267 billion worth of Chinese goods imports not already under punitive tariffs and China retaliates in kind. It also assumes that Trump imposes a 25 percent tariff on imported cars and auto parts.

Adjustments would occur as domestic production displaces higher-priced imports, the model shows, but in the long run, the U.S. GDP would still be 1.0 percent below a baseline without these tariffs, while China's GDP output would be one half percent below the baseline.

IMF cuts world economic growth forecasts on tariff war, emerging market strains
 

Related Articles

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.
  • Any comment you publish, together with your investing.com profile, will be public on investing.com and may be indexed and available through third party search engines, such as Google.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments (1)
Francisco Solis U
Francisco Solis U Oct 08, 2018 9:31PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
India did not follow your hints and Turkey will not raise interest rates, ...Turkey problems  are just due to US lira currency manipulation !!!
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
or
Sign up with Email