Brexit uncertainty and impact of Iran sanctions also likely to slow world growth, says Fund

Donald Trump’s claim that his protectionist measures are hurting China more than the US has received support from the International Monetary Fund in new forecasts showing how a fresh slowdown in the global economy has been concentrated in emerging economies.

The Washington-based IMF said the outlook was gloomier than it envisaged three months ago due to the tit-for-tat tariff war between the world’s two biggest economies, Brexit uncertainty and the impact of sanctions against Iran on oil prices.

In an update to its half-yearly World Economic Outlook, the IMF said it expected global growth to be 0.1 percentage points lower in both 2019 and 2020 than it envisaged in April, at 3.2% and 3.5% respectively.

The Fund’s country-by-country breakdown upgraded its forecast of US growth this year from 2.3% to 2.6% but downgraded China from 6.3% to 6.2%.

“In China, the negative effects of escalating tariffs and weakening external demand have added pressure to an economy already in the midst of a structural slowdown and needed regulatory strengthening to rein in high dependence on debt.”

Emerging and developing economies as a whole are now expected to grow by 4.1% this year – a cut of 0.3 points from April – with a slower pace of expansion pencilled in for Russia, India, Brazil and Mexico.

The forecasts came amid growing optimism that the US and China could soon settle their differences. Shares rose in Asia and Europe after it was reported that the US trade representative Robert Lighthizer and the treasury secretary Steven Mnuchin will meet China’s vice-premier, Liu He, next week.

The IMF said growth had been better than expected in the US and Japan in the first half of 2019, while one-off factors that had hurt growth in the eurozone in 2018 (notably, adjustments to new auto emissions standards) had appeared to fade as anticipated.

But despite upgrading its US growth forecast, the IMF fired a warning to the White House about the risks of a full-blown trade war.

“Multilateral and national policy actions are vital to place global growth on a stronger footing,” the IMF said. “The pressing needs include reducing trade and technology tensions and expeditiously resolving uncertainty around trade agreements (including between the UK and the EU and the free trade area encompassing Canada, Mexico and the US). Specifically, countries should not use tariffs to target bilateral trade balances or as a substitute for dialogue to pressure others for reforms.”

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The IMF said risks to its forecast were mainly to the downside. They included further trade and technology tensions that hit sentiment and reduced investment; a serious bout of jitters in financial markets that exposed the vulnerabilities of a decade of low interest rates; and growing deflationary pressures that would make servicing debts more expensive.

The IMF edged up its growth forecast for the UK this year from 1.2% to 1.3% and left it unchanged at 1.4% in 2020.

“The forecast assumes an orderly Brexit followed by a gradual transition to the new regime”, the IMF said in its WEO update. “However, as of mid-July, the ultimate form of Brexit remained highly uncertain.”