Yahoo Finance 'Complacent' markets could tumble as global economic growth spurt eases, IMF warns
The world’s economic growth spurt is almost at an end, the International Monetary Fund (IMF) warned as it slashed growth forecasts for most of the developed economies.
As a result overconfident markets could turn from boom to bust, further risking a downturn.
Global gross domestic product (GDP) growth should hit 3.9pc this year, up from 3.7pc in 2017, but plateau at that level before falling back in the years to come.
Parts of the rich world are already past the peak. The IMF downgraded growth expectations in the eurozone, UK and Japan, meaning all three will grow more slowly this year than in 2017.
Even the US, which is powering much of the current expansion with its 2.9pc growth spurt this year, will fail to match it in 2019.
This is because its long cyclical recovery is coming to a natural end, while the effect of tax cuts will wane and higher interest rates will slow growth, the IMF said.
At the same time the trade war will harm the global economy.
“The recently announced and anticipated tariff increases by the United States and retaliatory measures by trading partners have increased the likelihood of escalating and sustained trade actions,” said the IMF’s World Economic Outlook.
“These could derail the recovery and depress medium-term growth prospects, both through their direct impact on resource allocation and productivity and by raising uncertainty and taking a toll on investment.”
Markets could tumble as a result, the IMF warned.
“Asset prices are no doubt buoyed, not only by easy financial conditions, but by the generally still satisfactory global growth picture,” said the IMF, adding that markets seem “complacent”.
“They therefore are susceptible to sudden re-pricing if growth and expected corporate profits stall.”
Higher interest rates in the US could be one cause of a sharp fall in prices.
“Possible triggers include rising trade tensions and conflicts, geopolitical concerns, and mounting political uncertainty,” the IMF said.
A sharp fall in confidence could have knock-on effects on the wider economy, particularly through reduced investment.
Larry Fink, chairman and chief executive of the world's biggest fund manager Blackrock said trade war is the big risk.
“If we have a true tariff war, we will see the markets down 10-15pc,” he told Bloomberg Television, adding that the tariffs imposed so far remain too small to hit global GDP significantly.
“Symbolically, it is having an impact on investor sentiment and we are seeing investors pausing until there is greater certainty.”
Economists are particularly worried that the expansion of tariffs and more tit-for-tat retaliations will become a serious drag on growth.
JP Morgan’s Bruce Kasman said the plans announced so far would raise average US tariffs to 6.5pc. These, plus retaliation by countries such as China, will pull 0.25 percentage points off global growth, he estimates.
The impact is much more severe if the tariffs keep escalating.
Arend Kapteyn at UBS estimates a fully fledged trade war would disrupt supply chains and confidence in businesses, cutting global GDP growth by one percentage point, China’s by 2.3 percentage points and the US’s by 2.5 percentage points.
