February 21, 2020

IMF predicts “sluggish recovery” in global growth

headquarter of Internationnal Monetary Fund in Washington DC

The International Monetary Fund (IMF) cut its global growth forecast for this year on Monday due to a sharper than expected slowdown in India and other emerging nations, but it sees the recent U.S.-China trade deal as one more sign that trade and industry may be nearing a rebound.

The signing of the Sino-US trade deal is a breath of fresh air for the global economy, whose growth will rebound this year. But the recovery will be “sluggish” and weakened by the persistence of geopolitical risks, the IMF warned on Monday before the world economic elite in Davos. The International Monetary Fund was less optimistic than in October in its latest world growth forecasts published on Monday, now expecting 3.3% this year and 3.4% next year (-0.1 point and -0.2 point respectively).

But this is much better than last year when, under the effect of the trade war between the United States and China, the increase in the volume of international trade had melted (+1% after 3% in 2018) and brought global growth to 2.9%, its lowest level since the financial crisis.

“Moderate recovery”

“After a synchronized slowdown in 2019, we expect a moderate recovery in global growth this year and next,” IMF Managing Director Kristalina Georgieva commented at a press conference. But “we’re not out of the woods yet,” she added on the eve of the opening of the 50th World Economic Forum in Davos, Switzerland.

The recovery is being held back, for example, by “bad news” from India, which is suffering among other things from declining consumption, investment, budget deficits and delays in structural reforms. In addition, economies in other countries are being shaken by a deep-rooted street protest.

In Chile, student demonstrations against a rise in the price of subway tickets in October turned into a revolt on a scale not seen since the end of General Augusto Pinochet’s dictatorship (1973-1990).

The NGO Oxfam denounced on Monday, in its annual report on global inequalities, the growing concentration of wealth: according to its calculations, the world’s 2,153 billionaires now hold more money than the 4.6 billion poorest people in the world. These inequalities “are at the heart of social fractures and conflicts around the world,” said Pauline Leclère, spokesperson for Oxfam France, in a statement.

Climate risks

Another obstacle to growth, according to the IMF, is that renewed geopolitical tensions, particularly between the United States and Iran, could disrupt global oil supplies, harm morale and weaken already timid commercial investments.

On the international trade front, the truce between Washington and Beijing, sealed last week with the signing of a bilateral agreement, does not solve everything. It will certainly boost China’s growth this year. The IMF is now expecting a 6% increase, 0.2 points higher than the October estimate.

The United States will also benefit from the agreement, which will boost its exports of agricultural, industrial and energy products. But the expansion is running out of steam. US GDP growth will slow to 2% (-0.1 points) after 2.3% last year, as the effects of the tax reform fade away.

Nevertheless, the world’s leading power will continue to race ahead of the advanced countries, far from the euro zone countries (+1.3%) and Japan (+0.7%). Emerging and developing countries will grow by 4.4% after 3.7% in 2019.

The volume of international trade, which led the recovery from the global recession, will pick up again this year (+2.9% compared with 1% last year). But the increase will be lower than that estimated in October and far from the 3.7% recorded in 2018.

On a more positive note, temporary factors that had slowed global production, such as the adaptation of the automotive sector to new emissions standards, seem to be fading. However, all these projections “depend to a large extent on (the leaders’) ability to avoid a further escalation of US-China trade tensions (…), avoid a Brexit without an agreement and the economic ramifications of social unrest and geopolitical tensions,” the Washington-based institution warns.

If so, the recovery could be seriously under way, the IMF said at the start of the Davos Forum, which this year is expected to see many discussions revolving around the climate emergency and global turmoil, with US President Donald Trump and climate activist Greta Thunberg as the featured guests on its first day on Tuesday.

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