IMF warns of world tensions impacting on global economy

21 Jan 19

World leaders should immediately work to end the tensions in their countries that are impacting on the global economy, the IMF’s chief economist has urged.

The IMF has slashed its global growth outlook for 2019 to 3.5% - down from the 3.7% it pencilled in just months ago in October – because of political uncertainty and trade tension, in its World Economic Outlook released today.

Gita Gopinath, IMF’s chief economist, said recent political events, such as the uncertainty of Brexit, the ‘yellow vest’ protests in France and the US shutdown and the global trade war, could further worsen the global growth outlook. She was speaking today at a press conference at the World Economic Forum in Davos.

“Political risks are clearly very important,” Gopinath said.

“I think what is important is instead of waiting for an escalation of these political risks, is for leaders to immediately take action that prevent such unhappiness with the way that things are working out with some sections of society,” she added. 

“These are real concerns that need to be addressed.”

The outlook revised down its forecast for France, following the ‘yellow vest’ protests at the end of 2018.

Gopinath added that if there was an escalation of the trade war, especially between the US and China, it would have a negative impact on the forecasts.

The IMF expects China’s economic slowdown to continue. The forecast for this year and next is 6.2%. In 2018 China experienced the slowest growth, at 6.6%, since 1990, in line with previous IMF forecasts.

Gopinath said it seemed that financial markets had recently become more affected by trade tensions than they were last year.

“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 said.

The report also highlighted disruptions to the motor industry in Germany because of new fuel emissions standards, revising growth for 2019 down to 1.3%, 0.6 percentage points lower than projected in October’s outlook.

For the UK, the IMF projects a 1.5% growth rate this year and next but said there is substantial uncertainty about the figure because of the unknown outcome of Brexit.

Speaking of Brexit, Gopinath said: “A no-deal Brexit is one of the major risks to our forecast.”

 “If there is a disruptive exit or there is continued uncertainty for many more months, both of those are going to weigh negatively on economic growth going forward.”

She said the IMF estimated a no-deal Brexit would cut the UK’s economic growth by 5 to 8 percentage points on the long term.

This would be, partly, because it could mean it would reverse its terms with the World Trade Organisation.

“It is absolutely essential that this is solved as soon as possible,” she added.

Based on the assumption that a Brexit deal will be reached within 2019, the IMF projects growth in the UK to be at 1.5% this year and 1.6% in 2020 – a 0.1 percentage point cut.

IMF managing director Christine Lagarde, who also spoke at the press conference in Davos, said: “The world economy is growing more slowly and risks are rising.” However she added that it does not mean “a crisis is around the corner”.

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