IMF downgrades world growth, warns of 'precarious' 2020

This file photo taken on Apr 11, 2019, shows the seal of the International Monetary Fund at IMF Headquarters in Washington, DC. (Photo: AFP/Mandel Ngan)

Trade conflicts are undercutting investment and weakening manufacturing, and the IMF urged countries to avoid using tariffs to resolve their differences.

In the quarterly update of its World Economic Outlook, the IMF trimmed the global forecast issued in April by 0.1 percentage point this year and next, with growth expected to hit 3.2 per cent in 2019 and 3.5 per cent in 2020.

But the report sounded the alarm, saying things could easily go wrong.

"Global growth is sluggish and precarious, but it does not have to be this way, because some of this is self-inflicted," IMF chief economist Gita Gopinath told reporters.

"Dynamism in the global economy is being weighed down by prolonged policy uncertainty as trade tensions remain heightened despite the recent US-China trade truce ... and the prospects of a no-deal Brexit have increased," she said at a briefing in Santiago, Chile.

Gopinath warned that the recovery seen next year "is precarious" because "close to 70 percent of the increase relies on an improvement in the growth performance in stressed emerging market and developing economies and is therefore subject to high uncertainty."

However, the United States, which is at the centre of most of the trade tensions, saw one of the rare upgrades in the report, as it got a short-term boost from strong economic growth in the early part of the year.

The IMF raised the US GDP forecast by three-tenths of a percentage point to 2.6 per cent for 2019, but weakening demand, in part due to the trade conflicts and tariffs, points to "slowing momentum over the rest of the year."

US economic growth is expected to slow to 1.9 per cent in 2020.

China, which is the main target of US trade actions, was already experiencing a slowdown. But "the negative effects of escalating tariffs and weakening external demand have added pressure," the report said. A sudden slowdown in China is a key risk to the world economy.

The report downgraded Chinese growth by a tenth of a point this year and next, to 6.2 per cent and 6.0 per cent.

AVOID POLICY MISSTEPS

The IMF cautioned that there are an abundance of "potential triggers" for the situation to turn negative quickly, including the possibility of more US tariffs on China or on European autos, as well as a no-deal Brexit and the high debt levels in many countries.

"While the tensions abated in June, durable agreements to resolve differences remain subject to possibly protracted and difficult negotiations," the report said.

Gopinath repeated the IMF calculation showing that the combined effect of tariffs imposed last year and potential tariffs threatened in May between the United States and China could reduce global GDP in 2020 by 0.5 per cent.

The latest forecast was once again full of downgrades, with small downward revisions for Germany and Japan, but much larger cuts for Brazil, Mexico, Russia, India and South Africa - countries that were the engine for global growth in the wake of the 2008 financial crisis.

The IMF again stressed that resolving uncertainty remains the most pressing issue for the global economy and said governments should avoid "policy missteps" which could have "a severely debilitating effect on sentiment, growth and job creation."

And "countries should not use tariffs to target bilateral trade balances", the report said, while recognising that "trade disputes may be symptoms of deeper frustration with gaps in the rules-based multilateral trading system."

President Donald Trump and Chinese leader Xi Jinping in June agreed to a truce in their trade hostilities.

US Trade Representative Robert Lighthizer is set to lead a delegation to China on Monday for the first face-to-face meeting since talks collapsed in May, according to media reports.

Commerce Secretary Wilbur Ross said the "overriding objective" is to get a good deal, which "is much more important than exact timing."