IMF cuts global economic growth over Donald Trump’s tariff war

Virginia Carson
October 15, 2018

The IMF said the balance of risks was now tilted to the downside, with a higher likelihood that financial conditions will tighten further as interest rates normalize, hurting emerging markets further at a time when USA -led demand growth will start to slow as some tax cuts expire.

Rising trade tensions are a key challenge to the world economy as "protectionist rhetoric increasingly turned into action".

As the United States unilaterally imposed additional tariffs on some of its main trade partners in the past several months, the International Monetary Fund warned that "escalating trade tensions and the potential shift away from a multilateral, rules-based trading system" are key threats to the global outlook.

The report warned that growth "may have peaked in some major economies".

Tensions have soared in recent months with Donald Trump's administration rolling out billions of dollars in tariffs against China in a bid to tackle its trade deficit and rein in what Washington views as unacceptable trade practices by the Asian giant.

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The IMF warned the uncertainty caused by the trade disputes "could lead firms to postpone or forgo capital spending and hence slow down growth in investment and demand". Furthermore, China's debt to GDP ratio increased by around 100 percentage points, indicating border-lining financial crisis.

Christine Lagarde, managing director of the International Monetary Fund, last week called on economies around the world to "de-escalate and resolve the current trade disputes" as global economic growth outlook has dimmed.

And it stressed "cooperative solutions" to help boost continued growth in trade "remain essential to preserve and extend the global expansion".

The organization now forecasts that the world economy will grow 3.7 percent in 2019.

But the United States tax cuts and rising spending that have boosted growth, helping compensate for the impact of the growing trade conflict, could spark a sudden "inflation surprise", and in turn lead to faster-than-expected rise in United States interest rates, according to the fund.

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The downgrade reflects a confluence of factors, including the introduction of import tariffs between the United States and China, weaker performances by eurozone countries, Japan and Britain, and rising interest rates that are pressuring some emerging markets with capital outflows, notably Argentina, Brazil, Turkey and South Africa.

USA stimulus also adds to the "already-unsustainable" debt and deficit that will undercut future growth, the report warned.

The eurozone's 2018 growth forecast was cut to 2.0 percent from 2.2 percent previously, with Germany particularly hard hit by a drop in manufacturing orders and trade volumes.

That is down by 0.2 percentage point from the outlook three months ago.

The IMF also said that further disruptions in trade policies could occur owing to downside risks from two major impending regional trade arrangements-the United States-Mexico-Canada Agreement (which awaits legislative approval) and the European Union (with the latter negotiating the terms of Brexit).

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However, stimulus measures by Beijing are likely to soften the impact of the tariffs.

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