• Friday, March 29, 2024
businessday logo

BusinessDay

IMF flags trade war threat and warns of global economic slowdown

IMF flags trade war threat and warns of global economic slowdown

The global economy is weakening faster than expected with risks increasing from trade wars and volatility in financial markets, the IMF said on Monday ahead of the start of this year’s World Economic Forum in Davos.

Revising down its main economic forecasts, the fund said the global economy was likely to slow from 3.7 per cent growth in 2018, to 3.5 per cent in 2019 and 3.6 per cent in 2020. The new estimates are 0.2 percentage points and 0.1 percentage point respectively below the IMF’s most recent forecasts in October.

In just three months, these represent a significant shift for the global economic outlook and come as a result of weak data in Europe and Asia coupled with growing fears for the future.

The report paints a fragile picture of the world economy at a time when leaders have become more focused on domestic matters and calls for greater international co-operation to give business more confidence to invest in the future.

Gita Gopinath, the new chief economist of the IMF, said: “The cyclical forces that propelled broad-based global growth since the second half of 2017 may be weakening somewhat faster than we expected in October.”

“While this does not mean we are staring at a major downturn, it is important to take stock of the many rising risks,” she added.

Financial market turbulence was highlighting the risks from global trade tensions that have created uncertainty for business around the world, said Ms Gopinath. Investment has suffered and there are threats to global supply chains.

Also on Monday the UN’s trade and development agency said that global foreign direct investment fell 19 per cent last year to $1.2tn as a result of US President Donald Trump’s tax reforms.

One specific risk highlighted by the IMF was that Britain would exit the EU without a negotiated agreement, a so-called no-deal Brexit. The fund said this outcome was a “rising possibility” that could have negative spillovers across Europe.

As China on Monday reported its weakest growth since 1990, the IMF predicted that the slowdown could be steeper than currently expected, which Ms Gopinath said could “trigger abrupt sell-offs in financial and commodity markets as was the case in 2015-16”.

The fund also expressed concern about the budgetary position of Italy, which is also suffering from weakness in its banking sector. “A protracted period of elevated [Italian bond] yields would put further stress on Italian banks, weigh on economic activity and worsen debt dynamics,” the IMF said in the report.

The IMF called on countries to resolve trade tensions and for a smooth Brexit, all of which are more difficult because the US and UK administrations will be absent from the gathering at the Swiss ski resort of Davos due to mounting domestic crises.

“The main policy priority is for countries to resolve cooperatively and quickly their trade disagreements and the resulting policy uncertainty, rather than raising harmful barriers further and destabilising an already slowing global economy,” said Ms Gopinath.