This article is more than 1 year old

This article is more than 1 year old

A no-deal Brexit and a sharper slowdown in China are the biggest risks to growth in the global economy in 2019, the International Monetary Fund has warned in its latest economic outlook.

Amid already falling levels of growth in Europe, China and Japan, the IMF said an escalation of the trade war between Donald Trump and Beijing over the coming months and the UK tumbling out of the EU without a deal would force further downgrades in its forecasts for growth.

The Washington-based organisation said global growth would weaken from 3.7% in 2018 to 3.5% this year, down 0.2 percentage points from its prediction last October.

In a report published on the first day of the Davos leaders’ summit in Switzerland, it blamed the developed world for much of the downgrade and Germany and Italy in particular.

Unexpected developments had inflicted economic damage, it said, which in Germany followed the introduction of new fuel emission standards on cars, leading to a slump in production and purchases, and in Italy, where the economy ran out of steam in the wake of its battle with EU officials over the 2019 budget.

Turkey, which is projected to suffer a deeper contraction in growth this year than anticipated, also lay behind the worsening picture.

Christine Lagarde, the IMF’s managing director, said policymakers needed to make greater efforts to prepare for the slowdown, which could become more severe without greater cooperation.

“Even as the global economy moves forward, the risks that lie ahead are getting greater,” she said. “Does that mean a global recession is around the corner? No. Does that mean a global recession is around the corner? No. But the risk of a sharper decline in global growth has certainly increased.”

The UK’s GDP will grow by 1.5% this year, should it secure an agreement to leave the EU, and 1.6% in 2020 – 0.1 percentage points higher than previously forecast, while Germany will slump to 1.3% in 2019, down 0.6 percentage points, before recovering to 1.6% in 2020. Italy’s GDP will drop 0.4 percentage points to 0.6% this year before climbing to 0.9% in 2020.

Trade tensions in the wake of the tariffs imposed by Trump on Chinese imports last spring dented the strong growth seen in 2017. A further escalation of tit-for-tat tariff increases, which could follow a breakdown in talks due to take place in Washington this week, could force the IMF to tear up its latest forecasts.

However, the organisation, which acts as a lender of last resort to indebted countries, saved its gravest concerns for the prospect of a no-deal Brexit and a further slowing in China.

The report said: “A range of triggers beyond escalating trade tensions could spark a further deterioration in risk sentiment with adverse growth implications, especially given the high levels of public and private debt.

“These potential triggers include a ‘no-deal’ withdrawal of the UK from the EU and a greater-than-envisaged slowdown in China.”

Gita Gopinath, the IMF’s chief economist, warned the UK to avoid crashing out of the EU or risk a 5% to 8% reduction in GDP “over times”.

She said: “Our forecasts incorporate a smooth transition and if there is a decision to leave without a deal or further uncertainty, both scenarios would lead to a downgrade.

“It is imperative for leaders to resolve the situation as soon as possible [to protect growth],” added Gopinath, who became the IMF’s first woman economic counsellor and director of its research department in October.

Last year, the IMF warned that a financial crisis to rival the crash seen in 2008 was possible after an escalation in global debts and the failure of governments and regulators to push through all the reforms needed to protect the system from reckless behaviour.

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It urged countries “to resolve cooperatively and quickly their trade disagreements” and the resulting policy uncertainty, “rather than raising harmful barriers further and destabilising an already slowing global economy”.

Despite its gloomy prognosis, the IMF maintained a far rosier outlook than the World Bank, which earlier this month said global economic growth in 2019 would fall to 2.9% this year.

The bank, which focuses on supporting developing world countries, said global growth last year was only 3%, down from a forecast of 3.1% made in June last year.