IMF pins blame for slashed growth forecast on US-China trade war, warning of further deterioration if tensions fester.

The ongoing trade war between the United States and China will cut 2019 global economic growth to its slowest pace since the 2008-09 financial crisis, the International Monetary Fund (IMF) warned on Tuesday, adding that the outlook could darken considerably if trade tensions remain unresolved.

The IMF said its latest World Economic Outlook projections show 2019 global economic growth at 3 percent, down from its July forecast of 3.2 percent, thanks in large part to increasing fallout from global trade friction.

The outlook sets a gloomy backdrop for the IMF and World Bank annual meetings this week in Washington, DC, where the Fund’s new managing director, Kristalina Georgieva, is inheriting a range of problems, from stagnating trade to political backlash in some emerging market countries struggling with IMF-mandated austerity programmes.

The World Economic Outlook report spells out in sharp detail the economic difficulties caused by the US-China trade war, including direct costs, market turmoil, reduced investment and lower factory activity due to supply-chain disruptions.

The global crisis lender said that by 2020, announced tariffs would reduce global economic output by 0.8 percent. Georgieva said last week that this translates to a loss of $700bn, or the equivalent of making Switzerland’s economy disappear.

“The weakness in growth is driven by a sharp deterioration in manufacturing activity and global trade, with higher tariffs and prolonged trade policy uncertainty damaging investment and demand for capital goods,” IMF Chief Economist Gita Gopinath said in a statement.

Services were still strong across much of the world, but there were some signs of softening in the sector in the US and Europe, Gopinath said.

For 2020, the IMF sees global growth picking up to 3.4 percent – an expectation that rests on better performances in the economies of Brazil, Mexico, Russia, Saudi Arabia and Turkey. But even this forecast is a 10th of a point lower than in July and is vulnerable to downside risks, including worsening trade tensions, Brexit-related disruptions and an abrupt aversion to risk in financial markets.

Trade stalls

Global trade growth reached just 1 percent in the first half of 2019, the weakest level since 2012, weighed down by higher tariffs and prolonged uncertainty about trade policies, as well as a slump in the car industry.

After expanding by 3.6 percent in 2018, the IMF now projects global trade volume will increase just 1.1 percent in 2019, 1.4 percentage points less than it forecast in July.

Trade growth is expected to rebound to 3.2 percent in 2020, however, risks remained “skewed to the downside”, the IMF said, with a significant drag on both the US and Chinese economies.

New IMF projections show China’s economic output falling 2 percent in the near term under the current tariff scenario and 1 percent in the long term, while US output is forecast to decline 0.6 percent over both time spans.

“To rejuvenate growth policymakers must undo the trade barriers put in place with durable agreements, rein in geopolitical tensions and reduce domestic policy uncertainty,” Gopinath said.

Gopinath was cautious about President Donald Trump’s announcement on Friday of a “Phase 1” US trade deal with China, saying that more details were needed about the “tentative” deal.

The IMF also modelled what would happen if multinational firms in the US, the euro area and Japan repatriated enough manufacturing previously outsourced abroad – so-called “reshoring” – to reduce nominal imports by 10 percent. The lender found that it would drive up consumer prices and reduce domestic demand while throttling the spread of technology to emerging economies.