Another downgrade on world output for 2019 by the International Monetary Fund (IMF) means global economies would slow to levels last seen at the global financial crisis, with threats of capital outflow now hanging over emerging markets.
The fund in its October outlook downgraded global growth in 2019 to 3 percent as rising trade barriers and increasing geopolitical tensions continue to take toll. This would be its slowest pace since 2008.
Meanwhile, IMF forecast that the world output would see a modest improvement to 3.4 percent in 2020, a downward of 0.2 percentage point from its April projection.
The October outlook would make it no less than four times global growth has been downgraded by the IMF this year.
“Overall, trade volume growth in the first half of 2019 has fallen to 1 percent, the weakest level since 2012,’’ the Bretton Woods institution said, warning that heightened trade and geopolitical tensions, including Brexit-related risks, could further disrupt economic activity, and derail an already fragile recovery in emerging market economies and the euro area.
“This could lead to an abrupt shift in risk sentiment, financial disruptions, and a reversal in capital flows to emerging market economies,’’ the IMF said.
The Institute of International Finance (IIF) also noted that trade tensions weigh on growth and stoke volatility in emerging market capital flows, even as it maintained that increasingly accommodative monetary policy supports risk appetite and flows to EM.
A halt in policy normalisation by developed economies, which affected flows to emerging markets in 2018, favoured carry trade in the earlier part of the year.
In September, emerging markets (EM) bounced from one of its worst performing months after portfolio flows hit $37.7 billion.
The MSCI Emerging Index, which tracks performance of emerging market stocks, has risen by 5 percent in 2019.
The IMF said it revised growth in emerging market and developing economies to 3.9 percent for 2019 (compared to 4.5 percent in 2018), owing in part to trade and domestic policy uncertainties, and to a structural slowdown in China.
While for advanced economies, which continue to slow towards their lower long-term potential, growth has been downgraded to 1.7 percent for 2019 (compared to 2.3 percent in 2018) and remains at same level in 2020.
To rejuvenate growth, the fund recommends that policymakers undo the trade barriers put in place with durable agreements, rein in geopolitical tensions, and reduce domestic policy uncertainty.
There is also need for economic policy to support market activity in a more balanced manner with monetary complementing fiscal policies.
Furthermore, sustainable growth requires that countries undertake structural reforms to boost productivity, improve resilience, and lower inequality.
Reforms in emerging market and developing economies are also more effective when good governance is already in place, the IMF said.
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