A weakening global expansion amid growing risks

Factual Pursuit of Truth for Progress

While global growth in 2018 remained close to postcrisis highs, the
global expansion is weakening and at a rate that is somewhat faster
than expected.

In an update of the World Economic Outlook (WEO), the IMF projects
global growth at 3.5 percent in 2019 and 3.6 percent in 2020, 0.2 and
0.1 percentage point below last October’s projections.

While the Fund noted that downward revisions are modest; however, it
believe the risks to more significant downward corrections are rising.

While financial markets in advanced economies appeared to be decoupled
from trade tensions for much of 2018, the two have become intertwined
more recently, tightening financial conditions and escalating the
risks to global growth.

The global expansion weakening at faster rate

The report said it revised downwards its forecasts for advanced
economies slightly, mainly due to downward revisions for the euro
area. Within the euro area the significant revisions are for Germany,
where production difficulties in the auto sector and lower external
demand will weigh on growth in 2019, and for Italy where sovereign and
financial risks—and the connections between them—are adding headwinds
to growth.

The US expansion continues, but the forecast remains for a
deceleration with the unwinding of fiscal stimulus. Across advanced
economies, we foresee growth to slow from 2.3 percent in 2018 to 2
percent in 2019 and 1.7 percent in 2020.

This softening growth momentum has provided little lift to inflation.
While core inflation is close to target in the United States where
growth is above trend, it remains significantly below target in the
euro area and Japan.

Economic activity in emerging and developing economies is also
projected to tick down to 4.5 percent in 2019, with a rebound to 4.9
percent in 2020. The projection for 2019 has been lowered (0.2
percentage point) from October mainly because of a large projected
contraction in Turkey, amid policy tightening and adjustment to more
restrictive external financing conditions.

There is also a significant downgrade to growth in Mexico in 2019–20,
reflecting lower private investment. The projected rebound in 2020 is
due to an expected recovery in Argentina and Turkey.

The outlook for emerging markets and developing economies reflects the
continued headwinds from weaker capital flows following higher US
policy rates and exchange rate depreciations, even though they have
become less extreme. Across emerging economies, some of the pickup in
inflation reversed towards the end of 2018.

Overall, the cyclical forces that propelled broad-based global growth
since the second half of 2017 may be weakening somewhat faster than we
expected in October.

Trade and investment have slowed, industrial production outside the
United States has decelerated, and purchasing managers’ indices have
weakened, flagging softening momentum. While this does not mean we are
staring at a major downturn—it is important to take stock of the many
rising risks.

An escalation of trade tensions and a worsening of financial
conditions are key sources of risk to the outlook. Higher trade
uncertainty will further dampen investment and disrupt global supply
chains. A more serious tightening of financial conditions is
particularly costly given the high levels of private and public sector
debt in countries.
China’s growth slowdown could be faster than expected especially if
trade tensions continue, and this can trigger abrupt sell-offs in
financial and commodity markets as was the case in 2015–16.

In Europe the Brexit cliffhanger continues, and the costly spillovers
between sovereign and financial risk in Italy remain a threat. In the
United States a protracted US federal government shutdown poses
downside risks.

Policy priorities

Given this backdrop policymakers need to act now to reverse headwinds
to growth and prepare for the next downturn.

The main policy priority is for countries to resolve cooperatively and
quickly their trade disagreements and the resulting policy
uncertainty, rather than raising harmful barriers further and
destabilizing an already slowing global economy.

The call of Group of Twenty leaders to reform the World Trade
Organization in Buenos Aires must be accomplished. Where fiscal space
is low, fiscal policy needs to adjust in a growth-friendly manner to
ensure public debt is on a sustainable path, while protecting the most

Monetary policy in advanced economies should continue to normalize
carefully. The major central banks are keenly aware of the slowing
momentum—and we expect they will calibrate their next steps in line
with these developments. Macroprudential tools should be used where
financial vulnerabilities are building up. Across all economies,
measures to boost potential output growth and enhance inclusiveness
are imperatives.

Lastly, given that policy space for countries is more limited than in
2008, multilateral cooperation will be even more important in the
event of a sharper decline in global growth, and it is essential that
multilateral institutions like the IMF have adequate resources to deal
with the rising risks.


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