IMF: US sanctions threat will limit global economic recovery

Lender estimates 3.3% growth in 2020, down from a previous forecast of 3.4%

The International Monetary Fund has warned that the world economy is increasingly vulnerable to the impact of the climate emergency as the Washington-based organisation downgraded its 2020 and 2021 growth forecasts.

Urging governments to make greater strides to reduce carbon emissions and build green infrastructure, the IMF said one of the main risk to its forecasts came from the growing costs of the climate crisis and the harm caused by protectionist trade policies.

It also cited political wrangling between the US and Iran, and the potential for social unrest to spread across the Middle East as further threats to the global economic outlook.

In its half-yearly health check on the global economy, the IMF said: “Weather-related disasters such as tropical storms, floods, heatwaves, droughts, and wildfires have imposed severe humanitarian costs and livelihood loss across multiple regions in recent years.

“Climate change, the driver of the increased frequency and intensity of weather-related disasters, already endangers health and economic outcomes, and not only in the directly affected regions.

“It could pose challenges to other areas that may not yet feel the direct effects, including by contributing to cross-border migration or financial stress (for instance, in the insurance sector). A continuation of the trends could inflict even bigger losses across more countries.”

Speaking in Davos at the World Economic Forum, IMF chief economist Gita Gopinath added “the climate risk is near and present” and “it is a major issue that demands governments step up”.

The report also cited the possible breakdown in US/China relations following a first phase deal last week, further trade sanctions by the US on Europe and the spread of social unrest as putting in jeopardy the recovery over the next two years.

While a long manufacturing recession in China, the US and much of Europe appeared to be coming to an end, or at least not deteriorating further, the downbeat report said a recovery would be weak, especially in the usually buoyant emerging market economies.

The UK is expected to grow only modestly and in line with the IMF’s previous forecast at 1.3% last year, 1.4% this year and 1.5% next year. This is based on an orderly exit from the EU later this year and a smooth transition to a new trading relationship from 2021.

Gopinath said that since the UK election result last month the IMF had downgraded the threat from a no-deal Brexit, offsetting trade tensions in other parts of the world. Reductions in interest rates by 49 central banks last year had added around o.5 percentage points to global growth. The first phase trade deal between the US and China had reduced the negative impact of protectionist policies built into the forecast by 0.3 percentage points, she added.

However, the global economy will grow by an estimated 3.3% in 2020, down from a previous forecast of 3.4%, and is expected to be 0.2 percentage points lower in 2021 at 3.4%.

The escalating tit-for-tat tariff war between the US and China last year was mostly to blame for a 0.1 percentage point cut in the estimate for growth for 2019 to 2.9%.

As recently as 2017, the global economy grew by 3.8%. Before the financial crisis in 2006, it expanded at the much faster rate of 5.5%.

In reports published earlier this month, the UN and the World Bank signalled weaker growth this year, citing ongoing trade protectionism and growing debt crisis for creating uncertainty and limiting business investment.

The IMF said the downward revision in the near term reflected “negative surprises to economic activity in a few emerging market economies, notably India, which led to a reassessment of growth prospects over the next two years. In a few cases, this reassessment also reflects the impact of increased social unrest.”

South Africa, Mexico and India were among countries suffering significantly from the uncertainty that dominated trading relationships in 2019.

It said the prospects for a durable resolution to trade and technology tensions between the US and China remained elusive, despite sporadic favourable news on ongoing negotiations.

It added: “Further deterioration in economic relations between the US and its trading partners (seen, for example, in frictions between the United States and the European Union), or in trade ties involving other countries, could undermine the nascent bottoming out of global manufacturing and trade, leading global growth to fall short of the baseline.”

Date : 20 Jan 2020 06:21 PM