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IMF Cuts Global Growth Forecast as Trade Tensions Weigh

IMF Cuts Global Growth Forecast as Trade Tensions Weigh

2019-10-15 15:05:00
Thomas Westwater,
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IMF Global Growth Forecast:

  • IMF predicts weakest global growth since the 2008 financial crisis, as 2019 global growth is downgraded to 3.0%
  • Trade tensions, manufacturing, and geopolitical factors attributed to much of the risk in the global economy
  • Developed economies seen to be in synchronized slowdown, while emerging economies gain momentum

The latest report from the International Monetary Fund (IMF) paints a gloomy picture for the global economy, as the global crisis lender cuts their outlook on global growth to 3.0% for 2019, marking the weakest global growth rate since the financial crisis. The downgrades from the IMF encompassed most developed economies while emerging economies are seen to outperform their advanced counterparts.

The IMF report isn’t the first harbinger for signs of economic trouble as their outlook echoes the OECD as they also downgraded global growth last month. Both the Federal Reserve and the ECB are easing policy with Europe’s Central Bank leading the charge as they announced a massive new bond buying program on top of a cut to the deposit rate last month.

Gita Gopinath, the IMF’s Chief Economist stated in the report’s forward that “As policy priorities go, undoing the trade barriers put in place with durable agreements and reining in geopolitical tensions top the list. Such actions can significantly boost confidence, rejuvenate investment, halt the slide in trade and manufacturing, and raise world growth.”

The concerns about manufacturing in the IMF report have already surfaced for manufacturing in the United States which has seen a notable slowdown, evident by the Institute for Supply Management’s Manufacturing report reflecting the weakest activity in the sector since 2009. Consumer weakness is also surfacing recently and reflects greater concern as the worlds largest consumer economy is now showing a decreased appetite for spending from consumers.

ISM Manufacturing vs Non-Manufacturing

ISM Manufacturing VS Services

The IMF also cited geopolitical factors as a drag on the economy with Brexit being cited as a risk that has the potential to disrupt supply chains and hammer business confidence. Geological risks cited in the IMF report are reflective of the same outlook from both the OECD and the Federal Reserve. US Federal Reserve Chair Jerome Powell mentioned trade policy in his press conference last month stating "a number of geopolitical risks, including Brexit, remain unresolved. Trade policy tensions have waxed, and waned, and elevated uncertainty is weighing on U.S. investment and exports.

Global Economic Policy Uncertainty Index with Current Price GDP Weights

IMF Cuts Global Growth Forecast as Trade Tensions Weigh

With most central banks already in an accommodative stance, uncertainty continues around the effectiveness monetary policy can have to combat the next downturn. The IMF cites low inflation as a challenge facing central banks and a factor that will hamper monetary policy. With financial risk increasing, due in part to the accommodative polices from central banks, the report stresses that a mix between fiscal and monetary policies is necessary. Specifically, the IMF suggests Germany to take advantage of negative rates to make capital investments in infrastructure.

While the United States and China made a partial deal this past week on the trade war front, there is still much uncertainty going forward, with market participants remaining wary with no concrete commitments from either side being seen yet. However, there is optimism that US and China are making progress as some consumers appear upbeat about talks going forward, evident from the latest University of Michigan Consumer Sentiment report.

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