IMF remains positive on growth but cautious on trade

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Despite the uncertainty and the negative news surrounding the trade wars rhetoric that is touted to impact the global growth, forecasts from the International Monetary Fund last week showed that growth in the global economy will remain robust. This comes amid various other risks including the political uncertainty in the Eurozone and the declines in the emerging market currencies.

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The IMF offered some positive news last week as it noted that the global economy was on track to rise at a pace of 3.9% for this year and the next year. This was an unchanged forecast from the report released in April earlier this year. If the IMF’s forecasts are matched, it would mark the best back to back periods of growth since 2011.

While the IMF’s report sounded optimistic, there were also a lot of caveats. The IMF did strike a cautious tone in its report as it noted that growth could be less evenly spread among the world’s economies compared to the year before.

The IMF said that in particular, the major risk comes from the U.S. driven trade rhetoric. The U.S. administration under President Trump had embarked on what many consider it to be protectionist policies. The IMF said that the escalation of the trade wars would remain a major risk to growth.

IMF

The “risks to the outlook are mounting,” the IMF said in its recent report.  Commenting further, the IMF’s chief economist, Maurice Obstfeld said that the trade tensions posed “the greatest near term threat” to the world’s economic growth.

The chief economist further went on to add that according to the IMF’s model if the current trade policies of higher tariffs were realized, it could potentially impact global growth by shaving off 0.5% from the current projections in 2020. In other words, this is expected to lead to hundreds of billions worth of economic output that could be lost.

The IMF said that the current trade sanctions were still manageable as they apply to only a few parts of the exports sector.

The IMF’s grim warning comes as the U.S. administration has been threatening China with imposing fresh tariffs. Among the sectors also include higher tariffs on automobile imports. The U.S. administration has currently raised tariffs on steel and aluminum imports which did not go well with many of the trading partners that included China, the European Union and Canada and Mexico.

The U.S. administration also imposed fresh tariffs on goods worth $34 billion from China that included washing machines and solar panels.

Another round of trade tariffs is expected for which a decision is expected to be taken around early August.

Amid the backdrop, the IMF said that while the U.S. continued to impose higher trade tariffs, many other nations were not in conflict with each other. This is expected to eventually backfire on the U.S. economy.

The IMF also forecast that the U.S. economy would advance at a pace of 2.9% this year. This was an unchanged estimate from the forecasts released in April. The forecasts come ahead of this week’s advance GDP report.

Expectations run high that the U.S. economy advanced at a pace of 4.0% in the second quarter of the year.

Forecasts for the Eurozone and Japan were both lowered by 0.2 percentage points while Canada’s growth outlook was unchanged.

The Eurozone GDP is forecast to rise at a pace of 2.2% while GDP forecasts for Britain were cut down to 1.4% from 1.6% that was initially estimated in April.

Growth prospects for Latin American countries were left unchanged as the declines in the respective currencies were offset by growth in the Middle-East largely due to higher oil prices.

While the global economy is currently poised to make good gains in the second quarter, the upcoming third and fourth quarter reports are more likely to make investors nervous if more trade tariffs are applied by the U.S. administration.

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