5 things weighing on the world economy, according to the IMF

by Rosamond Hutt, 31 Jul 2019

“Sluggish and precarious. But it doesn’t have to be this way because some of this is self-inflicted.”

That’s how the International Monetary Fund’s (IMF) Chief Economist Gita Gopinath recently summed up the state of global growth.

Her call for “supportive policies” came as the IMF cut its growth forecasts for the global economy in its latest quarterly World Economic Outlook.

The July update predicts growth of 3.2% in 2019 and 3.5% in 2020 – a reduction of 0.1 percentage points for both years from its April projections, which the IMF had already revised down.

With the global growth outlook already at its weakest since the financial crisis, here’s a look at a few of the things weighing on the world economy.

1. Trade tensions

Global trade growth declined to 0.5% (year-on-year) in the first quarter of 2019 – its slowest pace since 2012.

Those figures came before the recent trade truce between the US and China at the G20 summit, but tensions remain high.

The IMF is also concerned about the prospect of US restrictions on Chinese technology, which threaten to disrupt global tech supply chains.

2. Brexit

At the same time, the chances of a no-deal Brexit have increased.

“The principal risk factor to the global economy is that adverse developments – including further US-China tariffs, US auto tariffs, or a no-deal Brexit – sap confidence, weaken investment, dislocate global supply chains, and severely slow global growth below the baseline,” the IMF said.

To bolster growth, the IMF suggests easing trade and technology tensions and quickly resolving uncertainty around trade agreements, including between the UK and EU, as well as the free trade area spanning Canada, Mexico and the US.

3. Global risk aversion

In May, rising US-China trade tensions triggered a sudden episode of risk aversion in global markets.

The IMF is worried such “risk-off episodes” could “expose financial vulnerabilities accumulated during years of low interest rates”, squeezing highly leveraged borrowers.

Potential triggers could include “further increases in trade tensions; protracted fiscal policy uncertainty and worsening debt dynamics in some high-debt countries; an intensification of the stress in large emerging markets currently in the midst of difficult macroeconomic adjustment processes (such as in Argentina and Turkey); or a sharper-than-expected slowdown in China”.

4. Deflationary pressures

Slower global growth and lower inflation in both advanced and emerging economies have revived concerns about disinflationary spirals.

Lower inflation and entrenched lower inflation expectations make it more difficult for borrowers to service debts, reduce corporate appetite for investment and affect the ability of central banks to counter a downturn with loose monetary policy.

5. Climate change, conflict and geopolitical tensions

Greater global cooperation is urgently needed to tackle climate change, according to the IMF.

It emphasized that climate change “remains an overarching threat to health and livelihoods in many countries, as well as to global economic activity”.

The IMF is also concerned about conflict, which brings “horrific humanitarian costs” and migration strains to neighbouring countries.

Together with geopolitical tensions – notably recently in the Persian Gulf – this increases the risk of higher volatility in commodity markets.