Clouds on the horizon

The deteriorating trade climate and the U.S.-China conflict are holding back global growth

April 17, 2019 12:15 am | Updated 12:46 am IST

Christine Lagarde

Christine Lagarde

At the recent spring meeting sof the International Monetary Fund (IMF) and World Bank, Finance Ministers and central bank Governors by and large played down fears about a slowing global economy. Their optimism was based on the pause in the U.S.’s interest rate policy in February, ease in the country’s trade tensions with China, and receding risk of a hard Brexit.

However, in stark contrast, the IMF has consistently emphasised a cautious stance on the current growth trajectory for some months. As the ultra-low interest rates of the post-crisis years have come to stay in many economies, the IMF has highlighted the limits of monetary policy in a future downturn. Its latest economic forecast cuts the outlook for growth in 2019 to 3.3% from estimates of 3.5% in January and 3.7% in October, when it had cited concerns over trade protectionism and the flight of capital from vulnerable emerging economies.

These projections were echoed by the IMF chief at the U.S. Chamber of Commerce earlier this month. Christine Lagarde said that whereas two years ago, 75% of the global economy experienced an upswing, the expectation this annum is for a slump in 70% of the world economy. Contributing to the overall deceleration is the deteriorating trade climate of the last two years. The pace of exports and imports was 4.6% in 2017, the strongest since the rebound after the 2007-08 financial crisis. But the 2018 figures were a modest 3% and could fall much further this year, says the WTO.

In the U.S., where year-on-year growth touched 2.9%, the fund’s forecast is 2.3% in 2019 — a far cry from the 4% rate in the second quarter last year. The Federal Reserve has also lowered its estimate from 2.3% to 2.1%, a sign possibly of the fading impact of President Donald Trump’s 2017 corporate tax cuts. A more than anticipated fall in recent German imports and exports is said to reflect, among other things, the impact of the trade friction between the U.S. and China and growing uncertainty over Britain’s exit from the European Union.

While stopping short of projecting a global recession, the IMF forecasts growth to touch 3.6% in 2020, lower than earlier estimates. That would be underpinned by tepid growth in the advanced world and hopes of a stable Chinese environment. The potential for an acceleration depends on Argentina and Turkey climbing out of a recession, besides a precarious rebound in other emerging and developing economies. During last week’s meeting, the view among Finance Ministers was that the IMF was painting a rather grim picture of the world economy. The hope is that their optimism will be borne out by evidence. Equally, a lasting resolution of the U.S.-China trade dispute would revive momentum in the global economy.

The writer is a Deputy Editor at The Hindu

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