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economy GLOBAL ECONOMIC OUTLOOK

IMF warns of rising risks to global growth amid trade tensions

Venezuela facing economic collapse, international organisation warns.

Monday 16 July, 2018
The IMF has warned of rising risks to global growth amid trade tensions.
The IMF has warned of rising risks to global growth amid trade tensions. Foto:HANDOUT

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The global economy is still expected to grow at a solid pace this year, but worsening trade confrontations pose serious risks to the outlook, the International Monetary Fund (IMF) said today.

The IMF's updated World Economic Outlook (WEO) forecast global growth of 3.9 percent this year and next, despite sharp downgrades to estimates for Germany, France and Japan.

The US economy is still seen growing by 2.9 percent this year, and the estimate for China remains 6.6 percent, with little impact expected near term from the tariffs on tens of billions of dollars in exports the countries have imposed on each other so far.

"But the risk that current trade tensions escalate further – with adverse effects on confidence, asset prices, and investment – is the greatest near-term threat to global growth," IMF Chief Economist Maurice Obstfeld said.

The fund warns growth could be cut by a half point by 2020 if tariff threats are carried out.

Although the global recovery is in its second year, growth has "plateaued" and become less balanced, and "the risk of worse outcomes has increased," Obstfeld said in a statement.

Addressing 'disenchantment'

The report comes as US President Donald Trump has imposed steep tariffs duties on US$34 billion in imports from China, with another US$200 billion coming as soon as September, on top of duties on steel and aluminium from around the world including key allies.

China has matched US tariffs dollar for dollar and threatened to take other steps to retaliate, while US exports face retaliatory taxes from Canada, Mexico and the European Union.

"An escalation of trade tensions could undermine business and financial market sentiment, denting investment and trade," the IMF report said. 

In addition, "higher trade barriers would make tradable goods less affordable, disrupt global supply chains, and slow the spread of new technologies, thus lowering productivity."

The IMF said growth prospects are below average in many countries and urged governments to take steps to ensure economic growth will continue.

The fund said global cooperation and a "rule-based trade system has a vital role to play in preserving the global expansion."

However, without steps to "ensure the benefits are shared by all, disenchantment with existing economic arrangements could well fuel further support for growth-detracting inward-looking policies."

Europe, Japan slowing

The sweeping US tax cuts approved in December will help the economy "strengthen temporarily," but growth is expected to moderate to 2.7 percent for 2019.

And while the fiscal stimulus will boost US demand, is also will increase inflationary pressures, the WEO warned.

China's growth also is seen slowing in 2019 to 6.4 percent.

After upgrading growth projections for the euro area in the April WEO, the IMF revised them down by two-tenths in 2018 to 2.2 percent, due to "negative surprises to activity in early 2018," and another tenth in 2019 to 1.9 percent.

The estimates for Germany, France and Italy were cut by 0.3 points each, with Germany seen expanding by 2.2 percent this year and 2.1 percent in 2019. France's GDP is expected to grow 1.8 percent and 1.7 percent.

Meanwhile, Britain is now forecast to grow 1.4 percent this year, 0.2 points less than the April estimate, and 1.5 percent in 2019.

Japan's GDP is seen slowing to 1.0 percent this year, two-tenths less than previously forecast, "following a contraction in the first quarter, owing to weak private consumption and investment." It should grow 0.9 percent the following year.

India remains a key drivers of global growth, but the GDP outlook was cut one-tenth for this year and three-tenths for next year to 7.3 percent and 7.5 percent, respectively.

Brazil saw an even sharper 0.5-point downward revisions from the April forecast, to 1.8 percent this year.

'Economic collapse' in Venezuela

Venezuela is in a state of "economic collapse" with hyperinflation not see since the middle of the last century, the IMF said in a grave warning.

Despite higher oil prices that are benefitting most exporting nations, the IMF sees a worsening contraction of the economy, which in April already was forecast to decline 15 percent, with inflation this year of 14,000 percent.

"It's very hard to exaggerate the extent of disruption in the Venezuelan economy," Obstfeld said.

Already the fund sees double-digit contraction in coming years and "we've increased our assessment about the degree of contraction," he told reporters. In addition, "we're seeing a hyperinflation rivalled only by Zimbabwe and the great historical hyperinflation of the inter-war period."

The IMF did not release a new forecast for Venezuela in the quarterly update to the World Economic Outlook, which provides a limited set of estimates.

Obstfeld noted the wave of migrants fleeing Venezuela was having an impact on neighbouring economies, even though there is no language barrier. 

"Just as in other parts of the world there is a huge challenge to absorb these migrants," he said.

OPEC data show Venezuelan oil production crashed to a new 30-year low of 1.5 million barrels a day in June.

The South American nation earns 96 percent of its revenue through oil sales but a lack of foreign exchange has sparked economic paralysis that has left the country suffering serious shortages of food and medicine.

The government of socialist President Nicolás Maduro has told state oil company PDVSA to increase production in the country which sits atop the world's largest reserves of crude.

- TIMES/AFP

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