In its newly-released World Economic Outlook (WEO) report, the International Monetary Fund (IMF) on Tuesday lowered its global growth forecast for 2019 to 3 percent, warning that growth continues to be weakened by rising trade barriers and growing geopolitical tensions.
Noting that this is the slowest pace since the global financial crisis, IMF chief economist Gita Gopinath told reporters that "there is no room for policy mistakes."
DOWNWARD REVISION AGAIN
The 3-percent global growth projection for 2019 is down 0.2 percentage point from the IMF's estimation in July, while the growth projection for 2020 was also lowered to 3.4 percent, down 0.1 percentage point from the earlier estimation.
Previously, the July WEO report already downgraded growth forecasts for 2019 and 2020, each down 0.1 percentage point from the estimation in April.
"The weakness in growth is driven by a sharp deterioration in manufacturing activity and global trade, with higher tariffs and prolonged trade policy uncertainty damaging investment and demand for capital goods," Gopinath said during a press conference at the global lender's headquarters.
Mark Sobel, U.S. chairman of the Official Monetary and Financial Institutions Forum, an independent think tank, wrote in a blog that manufacturing activity is declining in major advanced economies, "in no small part" due to the U.S. administration's "ill-advised trade wars," which may reduce global GDP by up to 1 percent.
According to the estimation by the IMF, overall trade volume growth in the first half of 2019 has fallen to 1 percent, the weakest level since 2012.
"Growth is also being weighed down by country-specific factors in several emerging market economies, and structural forces such as low productivity growth and aging demographics in advanced economies," Gopinath said at the press conference.
Growth in emerging market and developing economies has been revised down to 3.9 percent for 2019, compared to 4.5 percent last year, the report showed. Advanced economies continue to slow toward their long-term potential, with growth downgraded to 1.7 percent this year, compared to 2.3 percent in 2018.
TRADE TENSIONS' IMPACTS
The U.S.-China trade conflict has not only increased direct costs on businesses and consumers, but also caused "secondary effects," such as the loss of confidence and market reactions, said Kristalina Georgieva, the new IMF managing director, in a recent speech.
After holding a new round of high-level economic and trade consultations last week in Washington, China and the United States have achieved substantial progress in multiple areas, sparking cautious optimism for a possible trade agreement between the world's two largest economies.
"We look forward to more details on the recent tentative deal reached between China and the United States. We welcome any steps to de-escalate tensions and to roll back recent trade measures, particularly if they can provide a path towards a comprehensive and lasting deal," Gopinath said.
Craig Allen, president of the U.S.-China Business Council, told Xinhua in a recent interview that he remains optimistic that the two sides will eventually reach a trade agreement.
"Both countries realize that this (trade war) had a negative impact. So that's a good starting point for the agreement," he said.
Amid ongoing trade tensions, the IMF in its new WEO report lowered U.S. growth forecast for 2019 to 2.4 percent, down 0.2 percentage point from an earlier projection, while downgrading China's growth forecast for this year to 6.1 percent, down 0.1 percentage point from the previous projection.
The global lender recently estimated that the U.S.-China trade tensions will cumulatively reduce the level of global GDP by 0.8 percent by 2020, taking into account the proposed tariff hikes scheduled for Oct. 15 and Dec. 15. If these tariffs were never to happen, Gopinath said, that would bring down the estimated negative impact on global GDP from 0.8 percent to 0.6 percent.
The two countries, as the world's two largest economies, have "joint responsibilities" for the global economy and global institutions, and thus "we should manage those (differences) in a prudent manner," Allen said.
"The results are clear. Everyone loses in a trade war," said Georgieva. "So we need to work together, now, and find a lasting solution on trade."
NO ROOM FOR POLICY MISTAKES
Aside from trade tensions, Gopinath also highlighted geopolitical tensions as another downside risk to global growth, warning that Brexit-related risks could further disrupt economic activity, and derail an already fragile recovery in emerging market economies and the euro area.
The global outlook "remains precarious" with a synchronized slowdown and uncertain recovery, Gopinath said. "At 3 percent growth, there is no room for policy mistakes and an urgent need for policymakers to support growth," she said.
"To rejuvenate growth, policymakers must undo the trade barriers put in place with durable agreements, rein in geopolitical tensions, and reduce domestic policy uncertainty," said the IMF chief economist.
According to IMF's assessment, in the absence of monetary stimulus, global growth would be lowered by 0.5 percentage point in both 2019 and 2020. Gopinath, however, said that monetary policy cannot be the only game in town. "It should be coupled with fiscal support where fiscal space is available, and policy is not already too expansionary," she said.
While monetary easing has supported growth, she said, "it is essential that effective macroprudential regulation be deployed today to prevent mispricing of risk and excessive buildup of financial vulnerabilities."
For sustainable growth, Gopinath said, it is important that countries undertake structural reforms to boost productivity, improve resilience and reduce inequality.
"The global trading system needs to be improved, not abandoned," she said.
"Countries need to work together because multilateralism remains the only solution to tackling major issues, such as risks from climate change, cybersecurity risks, tax avoidance and tax evasion, and the opportunities and challenges of emerging financial technologies," she stressed.