Washington Insider: Trade Fight Could Weaken Global Economy, IMF says

Bloomberg is reporting this week that the International Monetary Fund (IMF) is downgrading the world economic outlook for first time since July 2016 and pointing at turbulence in emerging markets as another major factor. The report said that the IMF believes that the world economy is plateauing and cut its forecast as a result.On the eve of its annual meetings in Bali, Indonesia, the fund this week projected a global expansion of 3.7% this year and next, down from the 3.9% projected three months ago. It thinks that the global economy is still on track to match last year’s pace but thinks “fatigue is setting in and the overall performance is masking increasing divergence with mounting weakness in emerging markets from Brazil to Turkey,” Bloomberg said.The fund left its 2018 U.S. forecast unchanged but cut its expectation for next year, citing the impact of the trade conflict.Risks to the global outlook have risen in the last three months and now tilt to the downside, the IMF said. Threats include a further intensification of the trade war between the U.S. and countries including China and a sharper-than-expected rise in interest rates which would accelerate capital flight from emerging markets.“There are clouds on the horizon, it said. Growth has proven to be less balanced than we had hoped,” IMF Chief Economist Maurice Obstfeld told reporters Tuesday in Bali. “Not only have some downside risks identified in the last World Economic Outlook report been realized, but the likelihood of further negative shocks to our growth forecast has risen,” he said.The warning comes as finance ministers and central bankers from the 189 IMF member nations prepare to meet this week in Bali, Indonesia for the annual meetings of the fund and its sister institution, the World Bank. The Trump administration’s trade dispute with China is expected to be the “front and center” topic, along with the consequences of the Federal Reserve and other major central banks tightening monetary conditions after a decade of easy money.If the trade war continues, it could take a significant bite out of global growth, according to the fund. It estimates global output could fall by more than 0.8% in 2020 and remain 0.4% below its trend line over the long term, in a scenario where Trump follows through on all his threats, including global duties on cars. Output could fall by more than 1.6% in China and over 0.9% in the US next year, according to the IMF’s models.The IMF’s cut to its outlook was broad-based, Bloomberg said. The fund downgraded its forecast for U.S. growth next year to 2.5%, down 0.2 percentage point from July, after factoring in the impact of tariffs imposed by the Trump administration and retaliatory duties by other nations. It left its U.S. growth projection for this year at 2.9%.President Donald Trump has slapped tariffs on $250 billion in Chinese goods this year, and Beijing has retaliated with levies on $110 billion of American products. Also, the current IMF projections don’t take into account Trump’s threat to expand the tariffs to effectively all of the more than $500 billion in goods the U.S. bought from China last year, according to Bloomberg.The IMF also cut its outlook for China as a result of the tariffs, shaving its projection for growth next year to 6.2%, down 0.2 point from three months ago.Over the longer term, the IMF sees aging populations and sluggish productivity growth as a major challenge to advanced economies. Global growth will slow to 3.6% by 2022-2023, as growth in rich nations declines, it said.Most of the “meager gains” from growth have gone to the well off, fueling support for protectionism and anti-establishment leaders, said Obstfeld. “Policymakers must take a long-term perspective to address this malaise. Inclusive fiscal policies, educational investments, and ensuring access to adequate health care can reduce inequality and are key priorities,” he said.Many administration officials apparently believe that any negative economic impacts from the U.S. policies will be modest or even negligible — a view many, if not most, businesses and many lawmakers have not been eager to accept. In the meantime, the administration is hustling to implement a “farm aid” program to counter damages from the trade fight, along with programs to stimulate renewable fuel use.So, the trade fight appears to be intensifying, a trend producers should watch closely as it evolves, Washington Insider believes.