The latest update to the IMF World Economic Outlook sees a continued strengthening global growth environment, but noted that the balance of risk is turning negative, Research Department Director Maury Obstfeld told reporters in Washington, DC Monday (July 16).
Much of that risk comes from the ramping up of the threats of trade sanctions Obstfeld said.
“Our modelling suggests that if current trade policy threats are realized and business confidence falls as a result, global output would be about point five percent below current projections by 2020. That’s half a percentage point,” warned Obstfeld.
He stressed that the model was looking at worst-case scenarios, and that it was difficult to predict how the politics would eventually play out. But he did say that avoiding a conflict is the best course.
“The most positive and durable response to trade tensions would be negotiations with a broad range of trade partners that would open up China even more especially to imports,” Obstfeld said.
“The tragedy of the current set of tensions is that it risks creating a very bad outcome compared to what we could achieve if countries were to use multilateral mechanisms including the WTO. Think about where are the weaknesses that would prevent them from addressing the tensions and how they could repair those.”
Obstfeld said US growth will begin to slow from 2.9 percent this year to 2.7 percent in 2019 as the effects of tax cuts wear off.
The report notes financial tightening could also be triggered by higher inflation readings in the United States, where unemployment is below 4 percent but markets are pricing in a much shallower path of interest rate increases than the one in the projections of the Federal Open Market Committee.
India remains the fastest growing major world economy although its pace of growth is slowing from earlier projections, while China is holding steady at 6.6 percent projected growth this year.
Growth projections have been revised down for Argentina, Brazil, and India, while the 2019 outlook for some oil exporters has strengthened.
The IMF continues to recommend that countries take advantage of the current buoyant economic situation to shore up their fiscal positions and prepare for the next downturn, whenever that inevitably hits.
“It is urgent to address the underlying trends through equity and growth-friendly policies while assuring that macroeconomic tools are available to fight the next economic slow-down. Otherwise the political future will only darken.”
Immigration outflows from the developing world are part of those politics. Obstfeld said that stronger and more stable African and Latin American economies are part of the solution.
“Overall growth in Sub-Saharan Africa will exceed that of population for the next couple years, allowing per capita incomes to rise in many countries. But despite some recovery in commodity prices growth will still fall short of the levels seen in the commodity boom of the 2000’s. Adverse developments in Africa – civil strife or weather related shocks, for example – could intensify outward migration pressures toward Europe,” he said.