IMF warns global economic growth will slow by 2020

Good times in the global economy will not last, the IMF warned last Tuesday as it predicted that a slowdown was likely to be accompanied by trade wars.

In a sombre World Economic Outlook, its twice-yearly economic forecast, the fund highlighted the “jarring” contradiction between broad-based growth momentum and a “similarly broad-based conflict over trade”.

The fund urged nations to use a “window of opportunity” to carry out reforms to boost growth rates before the current upswing — the strongest since 2010 — petered out.

Maurice Obstfeld, the IMF’s chief economist, said global growth would slow by 2020 and warned that “major economies are flirting with trade war”, which would distract from the reform agenda “rather than advancing it”.

Many economists worry that the global economy has already hit a soft patch, pointing to weak industrial data in the first quarter, particularly in Europe, and global weakness in surveys of business activity. But the fund continues to predict a bright 2018 and 2019.

Mr Obstfeld said the upswing that started in 2016 was becoming “broader and stronger” although he cautioned that trade risks might already be taking a toll.

“The first shots in a potential trade war have now been fired,” he said. “Conflict could intensify if fiscal policies in the United States drive its trade deficit higher without action in Europe and Asia to reduce surpluses.”

Mr Obstfeld added that the threats by President Donald Trump’s administration to impose heavy tariffs would “do little” to reduce the country’s current account deficit, “which is owed primarily to a level of aggregate US spending that continues to exceed total income”

The fund forecast that the world economy would grow 3,9 percent in 2018 and 2019, unchanged from its January forecasts and significantly higher than those published last October, following a strong second half of 2017 almost everywhere.

The largest upward forecast revisions were for the US, where the IMF said tax cuts would cumulatively add 1,2 percent to the size of the country’s economy by 2020. But it added that the unfunded tax cuts were unsustainable, and that US economic performance would subsequently dip. The US economy was expected to grow 2,9 percent in 2018 and 2,7 percent in 2019.

There were smaller upward revisions for most other advanced and emerging economies, with China forecast to grow 6,6 percent in 2018 and 6,4 percent in 2019. Eurozone gross domestic product was predicted to rise 2,4 percent and 2 percent respectively across the two years.

The UK would remain one of the worst-performing advanced economies, with the lowest growth rates in Europe bar Italy as Brexit uncertainties took their toll, the fund said. Per person, the UK was forecast to move from the top of the G7 growth league before the Brexit vote to among the worst performers in the 2020s, the IMF said.

The IMF estimated that 60 percent of the improvement in its forecasts for the next five years stemmed from higher productivity and was therefore sustainable. But it estimated that by the end of 2018, advanced economies would run out of slack to maintain high growth rates without rising inflation. After that, growth rates would drop back below pre-crisis levels despite the recent better productivity performance.

“In advanced economies, ageing populations and lower projected advances in total factor productivity will make it hard to return to the pre-crisis pace for the average household’s income growth,” Mr Obstfeld said

Loose monetary policy was coming to an end and tighter financial conditions would expose some households, companies and countries to the full cost of the debt they had built up over the past decade of historically low interest rates, the IMF warned.

The fund urged countries to work domestically on policies to improve growth rates to sustain their societies as population ageing takes hold in the next decade and work together to minimise risks that local problems spill over into a global crisis. — Financial Times