Yahoo Finance IMF downgrades world economy on trade war fears as Brexit uncertainty weighs on Europe
Clouds are gathering over the world economy because of a burgeoning international trade war, while Brexit fears are taking an unexpected toll on Europe, the world’s lender of last resort has warned.
The International Monetary Fund has downgraded its forecast for global growth from by 0.2 percentage points this year and next, in its World Economic Outlook. The global economy is now set to expand by 3.7pc in 2018.
There were also mounting concerns of “further negative shocks” to this forecast, the IMF warned.
Growth in the euroarea was downgraded by 0.2 percentage points to 2pc in 2018 with a further slowdown to 1.9pc expected in 2019. However, the prediction for UK expansion remained at 1.4pc and 1.5pc for 2018 and 2019 respectively.
"These more moderate growth numbers and the weaker incoming data that underpin them owe, in part, to a sharp rise in policy uncertainty," said Maurice Obstfeld, the IMF's chief economist.
"The possible failure of Brexit negotiations poses another risk," he added.
Chief among the reasons for the downgrade to world output were rising interest rates and widespread political uncertainty which had triggered “disruptions” in trade policies.
Mr Obstfeld said: “The impacts of trade policy and uncertainty are becoming evident at the macroeconomic level, while anecdotal evidence accumulates on the resulting harm to companies.”
The US will also see its growth “decline” once its fiscal stimulus, delivered through wide-ranging tax cuts “goes into reverse” according to Mr Obstfeld. The US growth forecast was cut by 0.2 percentage points in 2019 tp 2.5pc.
Higher trade barriers also slow the spread of technology and lower productivity and welfare in many countries, the IMF said. While import restrictions were likely to result in more expensive goods hitting those with lowest incomes hardest.
As protectionist policies gather strength and undermine confidence countries were also unprepared for a serious downturn.
Mr Obstfeld said: “Governments have less fiscal and monetary ammunition than when the global financial crisis broke out ten years ago.”
Growth forecasts for emerging markets were given a more severe haircut by the Washington-based lender. These were reduced by 0.2 and 0.4 percentage points for this year and next, partly as a result of higher interest rates making these nations’ debts more costly to service.
A massive effort was demanded by global leaders if the multilateral world order, as exemplified institutions such as the World Trade Organisation, was to survive, warned Mr Obstfeld. This would have to involve a much more inclusive form of capitalism where wealth was better shared among societies.
He added: “Unless growth can be made more inclusive than it has been, centrist and multilateral approaches to politics and policy will become increasingly vulnerable—to the detriment of all.”
