In its latest update on the global economy, the International Monetary Fund downgraded its outlook in the wake of the ongoing trade war between the US and China which it says will hit growth both this year and next. Without any further escalation in the trade war, the IMF forecasts world growth to hit 3.7% in both 2018 and 2019, down from the 3.9% that was projected at the IMF’s last update in April.
US & China To Be Hardest Hit
The IMF noted that “The disruption caused by an escalation of trade restrictions could be particularly large in the United States and China, with GDP losses of more than 0.9 percent in the United States and over 1.6 percent in China in 2019,”
With the US having doubled its import tariffs on a vast range of Chinese goods, the IMF says that world growth will fall over 2018 and 2019 with some the critical global trading players such as France, Germany, and the UK also suffering consequently.
“An Intensification Of Trade Tensions”
In its statement, the IMF said “Escalating trade tensions and the potential shift away from a multilateral, rules-based trading system are important threats to the global outlook. Since the April 2018 forecast, protectionist rhetoric has increasingly turned into action, with the United States imposing tariffs on a variety of imports, including on $200 billion of imports from China, and trading partners undertaking or promising retaliatory and other protective measures.
“An intensification of trade tensions and the associated rise in policy uncertainty could dent business and financial market sentiment, trigger financial market volatility, and slow investment and trade.”
Furthermore, the IMF cautioned that in its next world economic outlook, scheduled next year, growth is likely to be revised lower once again due to the continuing threat of further trade tariffs.
Alongside the impact of the trade standoff between the world’s two largest economies, the IMF also notes Brexit uncertainty as a key factor likely to weigh on UK growth over the forecast horizon with 2018 growth cut to 1.1% from 1.3% prior.
Emerging Markets Under Strain
The IMF also noted the rise of USD and oil prices as a bearish factor on world growth due to the negative impact on emerging market currencies which have seen their USD funding requirements and oil import costs both rising sharply this year. Looking at the Eurozone, Germany had its growth forecast downgraded also, now forecast to grow at 1.9% this year next from the 2% forecast in April.
Australian Growth To Plateau
Commenting on Australia, the IMF noted that growth is forecast to hit a six-year high this year of 3.7% before plateauing as the US / China trade war causes a downturn in the domestic economy due to reduced export levels. Growth is forecast to be at 3.7% in 2019, down from the 3.9% forecast in April.
IMF Criticises Protectionist Trade Policies
Commenting on the context around these forecasts, the IMF urged countries to work together to solve economic challenges rather than focus on themselves. The IMF warned that protectionist trade policies are damaging world growth saying “cooperative efforts are also essential for completing the financial regulatory reform agenda, strengthening international taxation, enhancing cybersecurity, tackling corruption, and mitigating and coping with climate change.”
US Equities are now retesting the broken initial 2018 high of 2877.62. For now, the level is finding buyers, encouraged by the bullish trend line rising from this year’s lows. If we see a break of this level, the focus will be on a retest of structural support at the 2802.85 – 2787.89 region.