Trade War Imperils World Growth as IMF Sees ‘Complacent’ Markets
- The world economy will grow 3.9% this year and next, said the IMF. The pace this year would be the fastest since 2011.
- Global growth is already losing momentum in Europe and Japan as financial markets seem complacent to the mounting risks.
- Growth appears to have peaked in some major economies, and the boost from U.S. tax cuts and spending increases is expected to fade.
- At the same time, downside risks to the global economy are growing, led by the threat of a further ratcheting up of trade tensions.
- “The risk that current trade tensions escalate further — with adverse effects on confidence, asset prices, and investment — is the greatest near-term threat to global growth,” – IMF chief economist
- If threatened trade barriers become reality, global output could drop by about 0.5% below its projected level by 2020.
- The U.S. economy would be “especially vulnerable,” given it would be the focus of retaliation in a tit-for-tat conflict.
- The IMF projects the U.S. current-account deficit will widen, thwarting Trump’s plans to shrink it, as tax cuts and government spending increases boost demand for imports.
- Other risks include rising political uncertainty in Europe and the unresolved terms for Britain’s exit from the EU.
- America’s growing fiscal deficit will make it harder for the government to fight recessions and could increase the tax burden on future generations.
- “You kind of want to build up your buffers when times are good. You want to keep your powder dry for when you really need it, and that’s not the direction that U.S. fiscal policy has gone,”
China’s Cooling Economy Spells Trouble Ahead for Global Growth
- The ongoing campaign to curtail credit is putting the brakes on the world’s second-largest economy.
- China generates as much as a third of global growth, that’s adding to signs that the best world expansion in years is plateauing.
- The Chinese economy grew at an expected 6.7% in the second quarter, its slowest pace since 2016, while key readings on investment growth and industrial output slowed in June. Retail sales held up.
- While the numbers point to a modest slowdown in China, the U.S.-led trade war has only just begun.
- Trump is expected to deliver levies on another $16 billion worth of goods and has threatened to expand the hit-list by $200 billion. China has threatened to retaliate again.
- It’s the spillover effect that most worries economists, given China’s central role in a regional and global supply chain that feeds America’s economy with goods and services.
- China has the means to respond to slower growth given the massive fiscal and monetary firepower available to policy makers.