China trade war sparks International Monetary Fund global growth cut warning

Roman Schwartz
October 12, 2018

In 2017, India had clocked a 6.7 per cent growth rate.

Obstefeld commented: "Last April, at the time of our last World Economic Outlook, the world economy's broad-based momentum led us to project a 3.9 percent growth rate for both this year and next".

This acceleration, the world body said, reflected a rebound from transitory shocks (the currency exchange initiative and implementation of the national Goods and Services Tax), with strengthening investment and robust private consumption.

The cut its 2019 United States growth forecast to 2.5 percent from 2.7 percent previously, while it reduced China's 2019 growth forecast to 6.2 percent from 6.4 percent.

The Nikkei closed down 1.32 per cent this morning at 23,469.39. The reserve requirement ratio (RRR) was cut by a full percentage point, effective Octover 15, injecting a net 750 billion yuan (US$109.2 billion) in cash into the banking system.

The World Economic Outlook (WEO) presented twice annually in April and October also marked down the growth projections for the euro area and the United Kingdom, following surprises that suppressed activity in early 2018.

But it predicts that USA growth will slow to 2.5 percent next year as the effect of recent tax cuts wears off and as President Donald Trump's trade war with China takes a toll.

The financial market volatility will likely continue next year, because the US Federal Reserve, after raising the federal funds rate by 25 basis points in its September 26 meeting, nonetheless signaled another rate hike by the end of this year and maintained its projection for three rate hikes in 2019. The number is the same as last year's 3.7 percent growth.

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It sees the unemployment rate dropping to 3.9 percent in 2018 and to 3.5 percent in 2019.

The trade confrontation weighs on China in particular, where growth is projected to slow to 6.6 percent this year and 6.2 percent in 2019, a downgrade of 0.2 points.

"Trade policy reflects politics and politics remains unsettled in several countries, posing further risks", Obstfeld said.

"Priority areas in Russian Federation include improving property rights and governance, enhancing the institutional infrastructure, reforming labor markets, and investing in innovation and infrastructure", the report added. This it stated highlights the need to preserve and rebuild buffers.

"These efforts should be supported by further reductions in subsidies and enhanced compliance with the Goods and Services Tax", the International Monetary Fund report said.

Obstfeld, who retires from the International Monetary Fund later this year, said there were bright spots, with some Latin American and African nations getting growth forecast upgrades. "This is too low relative to where Nigeria should be in order to address issues of health, education and infrastructure, " she said.

Most of the "meagre gains" from growth have gone to the well-off, fuelling support for protectionism and anti-establishment leaders, said Mr Obstfeld.

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