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Further escalation of trade tensions may damage market sentiment, harm global growth

12 October 2018

The International Monetary Fund (IMF) on Monday retained economic growth projection for India at 7.3 per cent for 2018-19 (FY19), lower than the government's and the Reserve Bank of India's (RBI's) forecasts.

-China tariff war's impact to be felt next year, the Fund cut its 2019 US growth forecast to 2.5 percent from 2.7 percent previously, while it cut China's 2019 growth forecast to 6.2 percent from 6.4 percent.

The IMF expects the USA economy to grow 2.9 percent this year, the fastest pace since 2005 and unchanged from the July forecast. "Notwithstanding the present demand momentum, we have downgraded our 2019 USA growth forecast owing to the recently enacted tariffs on a wide range of imports from China and China's retaliation".

"Should market participants start pricing in the possibility of protracted trade tensions, financial conditions could tighten significantly, increasing the tail risk to global growth and financial stability", according to Global Financial Stability Report issued by the International Monetary Fund at its annual meetings in Bali.

Tensions have soared in recent months with US President Donald Trump's administration rolling out billions of US dollars in tariffs against China in a bid to tackle its trade deficit and rein in what Washington views as unacceptable trade practices by the Asian giant.

Regionally the growth forecast for the Middle East and North Africa was lowered by 1.2 and 1.3 percentage points to 2 and 2.5 per cent for this year and 2019.

But higher USA interest rates have also helped send emerging market currencies into a tailspin, as countries that borrowed heavily in dollars race to pay back debt.

The report also takes stock of global regulatory reform 10 years after the global financial crisis.

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The fund left its 2018 U.S. forecast unchanged but cut its expectation for next year, citing the impact of the trade conflict.

The IMF said the RRR cut, together with other easing and stimulus policies, "may help support economic growth in the near term in the face of rising external pressures.(but) may entail greater risks to financial stability over the medium term should they set back progress toward reducing financial vulnerabilities".

"In Angola, the region's second largest oil exporter, real GDP is expected to shrink by 0.1 per cent in 2018, following a 2.5 per cent contraction in 2017, but is projected to increase by 3.1 per cent in 2019". German growth was revised down to 1.9 percent in both 2018 and 2019 due to a slowdown in exports and industrial production.

Yi also expressed his confidence in the progress of this campaign to reduce financial risks. "Any sharp reversal for emerging markets would pose a significant threat to advanced economies", said Obstfeld.

Lagarde said she would meet Pakistani officials on Thursday, with expectations that Islamabad will request a bailout of its shaky economy. Indonesia has been swept up in the market turmoil triggered by rising US interest rates and a stronger dollar, which has pushed the rupiah down 11 percent this year.

Over the longer term the impact to the United States economy will be almost one percentage point, while to China it will be half that.

The IMF sees Hungary's GDP growth slowing to 3.3 percent in 2019.

Further escalation of trade tensions may damage market sentiment, harm global growth