Investing.com - The International Monetary Fund cut its forecasts for the global economy and warned that downside risks are rising as trade tensions continue to weigh on the outlook.
In the latest update to its World Economic Outlook, the IMF cut its projection for global growth to 3.5% in 2019 with a minor recovery to 3.6% in 2020. In the previous update in October, it had predicted 3.7% growth for both years.
“The downward revisions are modest; however, we believe the risks to more significant downward corrections are rising,” Gita Gopinath, IMF’s economic counsellor and director of research, warned.
“While financial markets in advanced economies appeared to be decoupled from trade tensions for much of 2018, the two have become intertwined more recently, tightening financial conditions and escalating the risks to global growth,” she explained.
The IMF noted that the downgrade for advanced economies was due primarily to the decline in the euro zone. It emphasized Germany’s difficulties in the auto sector and lower external demand for its exports while sovereign and financial risks in Italy are adding to headwinds.
Although the U.S. expansion continues, the IMF predicts a deceleration, forecasting a decline in GDP growth to 2.5% in 2019 and a further softening to 1.8% in 2020 due to the fading of fiscal stimulus and the tightening of U.S. monetary policy. The IMF now thinks the federal funds rate will temporarily overshoot the 'neutral' rate of interest that neither stimulates nor restrains output.
“An escalation of trade tensions and a worsening of financial conditions are key sources of risk to the outlook. Higher trade uncertainty will further dampen investment and disrupt global supply chains,” Gopinath warned.
Data released on Monday showed that the Chinese economy grew 6.6% in 2018, the slowest annual pace since 1990, as weakening domestic demand and the negative impact of U.S. tariffs hit the world’s second-largest economy.
Markets have found some relief in news that Chinese Vice-Premier Liu He will meet with U.S. Trade Representative Robert Lighthizer and U.S. Treasury Secretary Steven Mnuchin in Washington on Jan. 30 and 31 in the hopes of reaching an agreement to end their long-standing trade dispute.