IMF fears trade war and weak Europe could trigger sharp global slowdown

Swiss special police officer keeps watch from a rooftop, ahead of inauguration of World Economic Forum (WEF) in Davos, Switzerland - Reuters

DAVOS, Switzerland (Reuters): The International Monetary Fund on Monday cut its world economic growth forecasts for 2019 and 2020 due to weakness in Europe and some emerging markets, and said failure to resolve trade tensions could further destabilize a slowing global economy.

In 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.

The IMF predicted the global economy to grow at 3.5% in 2019 and 3.6% in 2020, down 0.2 and 0.1 percentage points respectively from last October’s forecasts.

The new forecasts, released on the eve of this week’s gathering 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.

“After two years of solid expansion, the world economy is growing more slowly than expected and risks are rising,” IMF Managing Director Christine Lagarde told a briefing.

“Does that mean a global recession is around the corner? No. But the risk of a sharper decline in global growth has certainly increased,” she said, urging policymakers to be ready for a “serious slowdown” by boosting their economies’ resilience to risks.

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% in 2018 to 1.6% 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%, down 0.2 percentage point from the previous projection and a slowdown from 4.7% in 2018.

“Emerging market and developing economies have been tested by difficult external conditions over the past few months amid trade tensions, rising US interest rates, dollar appreciation, capital outflows, and volatile oil prices,” the IMF said.

 

China’s economy cools

The IMF maintained its US growth projections of 2.5% this year and 1.8% in 2020, pointing to continued strength in domestic demand.

It also kept its China growth forecast at 6.2% 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,” the IMF said in the report.

The report came hours after data showing China’s economy cooled in the fourth quarter on faltering domestic demand and bruising US tariffs, dragging 2018 growth to the lowest in nearly three decades.