IMF downgrades growth forecast in wake of escalating trade tensions

Source: istock

The International Monetary Fund (IMF) has forecast that Australia will slip to 2.8 per cent growth next year, down from an expected peak of 3.2 per cent this year, due to the impact of the continued US-China trade war.

The IMF’s October World Economic Outlook report has revised down the forecasts for global growth contained in the April report by 0.2 per cent: from 3.9 per cent to 3.7 per cent. This is a rate comparable to 2017, and higher than any of the years between 2012 and 2016.

Maurice Obstfeld, chief economist at the IMF, said that growth downgrades owed in large part to the US tariffs on China and China’s retaliatory measures.

“Notwithstanding the present demand momentum, we have downgraded our 2019 US growth forecast owing to the recently enacted tariffs on a wide range of imports from China and China’s retaliation,” Obstfeld said.

“China’s expected 2019 growth is also marked down. Domestic Chinese policies are likely to prevent an even larger growth decline than the one we project, but at the cost of prolonging internal financial imbalances.”

“US tariffs on China, and more broadly on auto and auto part imports, may disrupt established supply chains, especially if met by retaliation,” 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. Trade policy reflects politics, and politics remain unsettled in several countries, posing further risks.”

The report states that the downward revision for Australia’s growth in the October report relative to its April estimate (2.9 per cent) partially reflect the negative effect of the recently introduced trade measures.

According to Obstfeld, the ability of governments to respond to economic threats to growth are quickly becoming more limited.

“Mechanisms of multilateral global policy cooperation are under strain, notably in trade, and need strengthening,” he said.

“Governments have less fiscal and monetary ammunition than when the global financial crisis broke out ten years ago, and therefore need to build their fiscal buffers and enhance resilience in additional ways, including by upgrading financial regulatory regimes and enacting structural reforms that raise business and labour-market dynamism.”