IMF warns escalating trade tensions cloud outlook for global economy

The International Monetary Fund (IMF) has warned of the risk to global growth from "escalating trade tensions".

In its latest World Economic Outlook report, the Washington DC-based fund said recently announced and anticipated tariff increases by the US, combined with retaliatory measures by trading partners, could "derail recovery and depress medium-term growth prospects".

As the global upswing approaches its two-year mark, the IMF said the pace of expansion in some economies appeared to have peaked, while growth had become less synchronised across countries.

“The outlook is also clouded by ongoing trade tensions, and waning support for global economic integration in some advanced economies.”

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The IMF said an escalation of trade tensions between the US and its trading partners, combined with Brexit and the possible fragmentation of the North American Free Trade Agreement, could undermine business and financial market sentiment while denting investment and trade.

“Beyond its immediate toll on market sentiment, the proliferation of trade measures could increase the uncertainty about the potential breadth of trade actions, thus hindering investment, while higher trade barriers would make tradable goods less affordable, disrupt global supply chains, and slow the spread of new technologies, thus lowering productivity,” it said.

Political uncertainty

Despite the downside risks, the fund maintained its global growth forecast for 2018 and 2019 at 3.9 per cent. However, it downgraded its growth outlook for the euro area economy, citing softer-than-expected activity in France and Germany and increased political uncertainty in Italy.

It predicted growth across the bloc would slow gradually from 2.4 per cent last year to 2.2 per cent in 2018 and to 1.9 per cent in 2019.

In the US, the near-term momentum in the economy was expected to strengthen temporarily on foot of the government’s recent tax cuts, with growth projected at 2.9 per cent in 2018 and 2.7per cent in 2019.

“Substantial fiscal stimulus, together with already-robust private final demand, will lift output further above potential and lower the unemployment rate below levels last registered 50 years ago, creating additional inflationary pressures,” the IMF said.

Fiscal buffers

The fund recommended that with reduced slack in the economy and downside risks mounting, “many countries need to rebuild fiscal buffers to create policy space for the next downturn and strengthen financial resilience to an environment of possibly higher market volatility”.

Its warning comes as the Republic’s largest business lobby criticised the Government’s plan to establish a so-called “rainy day fund”, suggesting the money to be set aside was too small to act as a buffer against future shocks.

In a pre-budget submission the employers’ group Ibec said the money should be used instead to address the funding crisis in higher education, which it described as one of the biggest issues facing the State.