It’s time for the IMF to update their global growth outlook. In the current environment, that’s the same thing as saying it’s time for the Fund to slash their forecasts again.
Now, the IMF sees the global economy expanding 3.2% in 2019, down from 3.3% in April and 3.5% in January. The outlook for 2020 was cut to 3.5% from 3.6% three months ago.
This is the fourth time the Fund has slashed its outlook in the space of nine months.
If you’re wondering whether trade frictions are to blame, the answer is yes.
“The forecast reflects the May 2019 increase of US tariffs on $200 billion of Chinese exports from 10% to 25%, and retaliation by China”, the IMF writes, adding that “the downgrades to the growth forecast for China and emerging Asia are broadly consistent with the simulated impact of intensifying trade tensions and associated confidence effects”.
The Fund now sees the Chinese economy expanding at a 6.2% rate this year and 6% in 2020, 0.1ppt lower than the April projection. Beijing said the economy grew at a 6.2% pace in Q2, the slowest in at least 27 years.
“In China, the negative effects of escalating tariffs and weakening external demand have added pressure to an economy already in the midst of a structural slowdown and needed regulatory strengthening to rein in high dependence on debt”, the IMF remarks.
The Fund’s latest update includes a massive downgrade to the outlook for Latin America, where growth is expected to clock in at just 0.6% this year. Here’s the rationale:
In Latin America, activity slowed notably at the start of the year across several economies, mostly reflecting idiosyncratic developments. The region is now expected to grow at 0.6 percent this year (0.8 percentage point lower than in the April WEO), recovering to 2.3 percent in 2020. The sizable downward revision for 2019 reflects downgrades to Brazil (where sentiment has weakened considerably as uncertainty persists about the approval of pension and other structural reforms) and Mexico (where investment remains weak and private consumption has slowed, reflecting policy uncertainty, weakening confidence, and rising borrowing costs, which could climb further following the recent sovereign rating downgrade).
The near-term good news is that the IMF sees the US economy expanding 2.6% this year, which is a rosier outlook than the 2.3% expansion the Fund projected in its April update. “The revision to 2019 growth reflects stronger-than-anticipated first quarter performance”, the Fund notes. That said, the IMF expects US growth to moderate to 1.9% in 2020, which would represent a laughable undershoot versus the Trump administration’s projections.
Ultimately, the Fund’s latest update is more of the same, and that’s not a good thing. “Downside risks have intensified since the April 2019 WEO”, the Fund says, summing up. “They include escalating trade and technology tensions, the possibility of a protracted risk-off episode that exposes financial vulnerabilities accumulated over years of low interest rates, geopolitical tensions, and mounting disinflationary pressures that make adverse shocks more persistent”.
Fortunately, the Fund’s boss will have an opportunity to help turn things around when she takes the reins from Mario Draghi. Unfortunately, that effort will be predicated on some of the same policy tools that have contributed to the “financial vulnerabilities” the IMF cites as having “accumulated over years of low interest rates”.
