Published: Wed, October 10, 2018
Money | By Ralph Mccoy

The IMF again downgrades outlook for the global economy

The IMF again downgrades outlook for the global economy

One of the International Monetary Fund (IMF)'s most detailed studies of the state of banking since the financial crisis reveals trade tensions are building and claims a "growing anxiety" around a breakdown in negotiations between Britain and the European Union could lead to financial uncertainty.

Global trade tensions would also have a bearing on the eurozone's 2018 growth forecast, which was cut to 2 percent from 2.2 percent previously.

Released in Bali during the annual meeting of the International Monetary Fund and the World Bank, the IMF's flagship World Economic Outlook said its 2019 growth projection for China is lower than in April, given the latest round of U.S. tariffs on Chinese imports, as are its projections for India.

The IMF said that global growth rates have hit a plateau at 3.7%, and would continue to remain at this level in 2019-'20.

The IMF announced it had reduced its outlook on the global economy to a 3.7% growth rate for this year and next, down 0.2% from what it had originally predicted in July. Both figures would mark the slowest rate of Chinese expansion since 1990, when its growth rate was slashed in the aftermath of the violent suppression of pro-democracy protests. "Any sharp reversal for emerging markets would pose a significant threat to advanced economies, as emerging market and developing economies make up about 40% of world GDP". "Not only have some downside risks we identified in the last WEO (World Economic Outlook) been realised, the likelihood of further negative shocks to our growth forecast has risen".

ANALYST'S TAKE: "Renewed tension between the U.S. and China has capped risk sentiment as a range of issues from trade to diplomacy are likely to challenge China-U.S. relationship", Zhu Huani of Mizuho Bank said in a commentary.

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On Sunday Pakistan's Prime Minister Imran Khan hinted at approaching the IMF, saying: "We may approach the IMF for support to the country's financial problems", but he insisted on looking toward other countries: "We have requested three countries to deposit funds in the State Bank of Pakistan that would boost the country's foreign exchange reserves".

In addition to the trade barriers, the International Monetary Fund said higher interest rates are also contributing to slowed economic growth.

How bad could the trade war get?

This growth exceeds that achieved in any of the years between 2012 and 2016, and it occurs as many economies have reached or are nearing full employment and as earlier deflation fears have dissipated.

"In the United States, momentum is still strong as fiscal stimulus continues to increase, but the forecast for 2019 has been revised down due to recently announced trade measures, including the tariffs imposed on $200 billion of USA imports from China", IMF report said.

The effects on the U.S. and China would be particularly severe, with 2019 GDP losses of more than 0.9% in the United States and 1.6% in China in 2019. The Trump administration has penalized almost half of all imports from China and has threatened more for the other half.

It also assumes that Trump imposes a 25% tariff on imported cars and auto parts imports.

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