The International Monetary Fund on Monday cut its world economic growth forecasts for 2019 and 2020, following weakness in Europe and other emerging markets.
The Fund said failure to resolve trade tensions across the world could further destabilise a slowing global economy, as it issues its second downgrade in three months’
The global lender also cited a bigger-than-expected slowdown in China’s economy and a possible “No Deal” Brexit as risks to its outlook, saying these could worsen market turbulence in financial markets.
It further 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 October’s forecasts.
The new forecasts, released ahead of this week’s meeting 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.
“Risks to global growth tilt to the downside. An escalation of trade tensions beyond those already incorporated in the forecast remain a key source of risk to the outlook.
“Higher 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,” the IMF said in an update to its World Economic Outlook report.
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 Rome’s 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 percentage point from the previous projection and a slowdown from 4.7 per cent in 2018.
“Emerging 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,” 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.
“As seen in 2015–16, concerns about the health of China’s 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,” it said.