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Global growth slackens on US-China trade spat
October 13, 2018, 2:35 pm

Economic integration under an open, rule based multilateral trade system remains the best approach to raise living standards, lift productivity and spread innovation throughout the world, said the International Monetary Fund (IMF) in its latest update on global economic health.

Multilateral cooperation is crucial to addressing many of the issues and challenges that transcend the borders of countries and impact global growth, said the Fund. Without explicitly referring to the retaliatory trade tariffs imposed bilaterally by the US and China, the IMF cautioned that weakening existing multilateral trade systems leads to an increase in trade costs, creates disagreements and raises trade and non-trade barriers that stymie trade, growth and economic development of countries around the world.

The recent decision by United States to impose tariffs on US imports of select items from China and elsewhere, has led to retaliatory tariffs by exporting countries on US goods. It has also prompted a stampede by several foreign countries looking to strike bilateral trade deals with the US, in place of previous multilateral agreements.

Reflecting the increasing international trade dissonance, the IMF lowered global economic growth to 3.7 percent for the 2018-19 period, a fall of 0.2 percent from what the Fund had estimated in April of this year.

Rationalizing the 0.2 percent downward assessment, the IMF said that the broad-based growth momentum in the global economy, which had prompted it to project a 3.9 percent growth rate for 2018-19 in April, had been over-optimistic in light of recent developments.

In its latest update to the biannual World Economic Outlook (WEO) report, released ahead of the annual IMF meeting held this year in the Indonesian island of Bali on 12 to 14 October, the Fund noted: “Downside risks to global growth have risen in the past six months and the potential for upside surprises have receded.

Rather than rising, global growth will plateau at 3.7 percent through 2018-19.”  For the Gulf Cooperation Council (GCC) states, the IMF envisions growth in real GDP for the 2018-19 period and smaller fiscal deficits based on recent higher hydrocarbon revenues and increased non-oil tax receipts. According to the latest WEO, the real GDP in Kuwait is projected to grow from the minus 3.3 percent in 2017, to 2.3 percent this year and 4.1 percent in 2019, the second highest growth among the six-nation bloc.

Other GCC countries are expected to display similar positive growth trends. Real GDP in Saudi Arabia is expected to grow by 2.2 percent in 2018 and 2.4 percent next year, while that of Qatar is projected to increase by 2.7 percent this year and 2.8 percent in 2019. The United Arab Emirates will grow 2.9 percent in 2018 and by 3.7 percent in 2019, while Bahrain will display a slowdown in 2019 to 2.6 percent from the 3.2 percent this year. Meanwhile, Oman is projected to display the largest real GDP growth in the region, going from 1.9 percent this year to 5 percent in 2019.

Despite this positive outlook for GCC states, the economic prognosis for the Middle East and North Africa (MENA) region as a whole is projected as being less than bright. Ongoing geopolitical challenges in the region and US imposed sanctions on Iran, which have roiled the Iranian economy and could impact its oil exports from November, have led the IMF to sharply slash growth forecasts for region as a whole. It now projects the MENA region to grow by 2 percent this year and 2.5 percent in 2019, which is 1.2 percent and 1.1 percent lower respectively from the Fund’s forecasts made in April.

Looking further ahead, the report indicated that global growth is expected to remain steady at 3.7 percent in 2020, and is projected to slow to 3.6 percent by 2022-2023, while growth in advanced economies will remain well above trend at 2.4 percent in 2018, before softening to 2.1 percent in 2019. Meanwhile, the Fund expected global trade to grow 4.2 percent this year, down from 5.2 percent in 2017 and from the 4.8 percent expected in July and projected it at 4 percent in 2019.

Other highlights from the report show that growth in the US will decline once parts of its fiscal stimulus go into reverse. “Notwithstanding the present demand momentum, we have downgraded our 2019 growth forecast for the US owing to the recently enacted tariffs on a wide range of imports from China and China’s retaliation,” said the Fund. Growth projections have also been marked down for the euro area and the United Kingdom, following surprises that suppressed activity in early 2018.

Moving on to China, the world’s second largest economy, the IMF underlined that even as domestic Chinese policies “are likely to prevent an even larger growth decline than the one we project, it could come at the cost of prolonging internal financial imbalances.” As such, IMF said it was lowering China’s growth projections for 2019 made in April by 0.2 percent to 6.2 percent, while maintaining growth in 2018 at 6.6 percent.

For India, the IMF said that important reforms implemented in recent years, including the Goods and Services Tax, the inflation targeting framework, the Insolvency and Bankruptcy Code, and steps to liberalize foreign investment and make it easier to do business, would see India maintain its position as the world’s fastest growing major economy this year and the next.

However, the Fund noted that external factors, including “the recent increase in oil prices and the tightening of global financial conditions” had cut into projections for India’s growth next year that it made in July by 0.1 percent to 7.4 percent, while retaining the 7.3 percent growth projection for this year. Beyond 2019, the IMF sees India’s growth rate improving “owing to structural reforms and a still-favorable demographic dividend.” The Fund added that “India’s medium-term growth prospects remain strong at 7.75 percent, benefiting from ongoing structural reform.”

Data from the report reiterates the view that IMF has repeatedly been stressing, about the importance of avoiding protectionist measures and finding a cooperative solution to preserve global expansion. The report calls on countries to pursue policies and reforms that aim at sustaining activity, raising medium-term growth, and enhancing inclusiveness.

- Staff Report

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