Thursday, 18 October, 2018

International Monetary Fund downgrades outlook for world economy to 3.7% growth

He says efforts are afoot to protect the interests of lower income segments of society He says efforts are afoot to protect the interests of lower income segments of society
Nellie Chapman | 12 October, 2018, 10:18

It's so concerned about the potential for a bad deal it has downgraded global economic growth to 3.7% for both 2018 and 2019, in its latest World Economic Outlook.

Pakistan's new government has chose to open talks on emergency financial assistance with the International Monetary Fund amid a mounting balance of payments crisis, the finance minister told local television on Monday.

The risk of a global financial crisis initiated by sharp capital outflows in emerging markets due to the divergence of monetary policies in the United States and developing countries remains small but will grow as the Federal Reserve continues to raise its interest rates, as it is expected to do this year and next.

Since the last stability report in April, global economic conditions have become less balanced, with a more pronounced divergence between advanced and emerging economies.

The dominant United States economy has been shielded from the ill effects so far due to the stimulus provided through tax cuts and spending policies, but that will wear off by 2020.

The Donald Trump administration's trade dispute with China is expected to be front and centre, as are the consequences of the Federal Reserve and other major central banks tightening monetary conditions after a decade of easy money.

Maurice Obstfeld, the IMF's chief economist, said at a media briefing about the fund's latest World Economic Outlook: "When you have the world's two largest economies at odds, that's a situation where everyone suffers".

At the worst, which includes Trump pushing through with tariffs on all Chinese goods and on imports of cars and auto parts that spark a round of reprisals, as well as denting confidence and provoking a negative market reaction, the impact would be less than one percentage point on global growth. "Not only have some downside risks we identified in the last WEO (World Economic Outlook) been realised, the likelihood of further negative shocks to our growth forecast has risen".

World Bank President Jim Yong Kim said he's concerned about developing economies losing out from deepening trade tensions, which are being escalated by the U.S.

And if it continues, the "escalation of trade tensions to an intensity that carries systemic risk is a distinct possibility without policy cooperation".

Overall, global growth will remain steady - about 3.7 percent this year - and exceed that of 2012-2016. The reserve requirement ratio (RRR) was cut by a full percentage point, effective Octover 15, injecting a net 750 billion yuan (US$109.2 billion) in cash into the banking system.

"Growth is now much more uneven" than six months ago, he told reporters.

It is the first time the fund has cut its forecast in more than two years.

The eurozone's 2018 growth forecast was cut to 2.0 percent from 2.2 percent previously, with Germany particularly hard hit by a drop in manufacturing orders and trade volumes. Using a hypothetical "stress test" scenario developed by the US Federal Reserve for banking regulation, the International Monetary Fund found a severe recession would cut the value of America's publicly held assets by an amount equal to 26 per cent of GDP by 2020.

The fund urged governments to focus on policies that can share the benefits of growth more widely, helping counter the growing mistrust of institutions, and to avoid "protectionist reactions to structural change". "Growth has proven to be less balanced than we had hoped".

China and the United States have slapped tit-for-tat tariffs over the past few months, rattling financial markets as investors anxious the escalating trade war could knock global trade and investment.

USA stimulus also adds to the "already-unsustainable" debt and deficit that will undercut future growth, the report warned. In 2017, India had clocked a 6.7 per cent growth rate.

It cautioned, "Turkey has a currency that is about 40 percent cheap to its long-term average, and the International Monetary Fund assumes the CA deficit will shrink from 5.7 percent of GDP in 2018 to 1.4 percent of GDP in 2019".