IMF downgrades US economic forecast while warning of rising tide of populist backlash

PUBLISHED : Wednesday, 05 October, 2016, 3:20am
UPDATED : Wednesday, 05 October, 2016, 3:20am

The International Monetary Fund on Tuesday downgraded its forecast for the US economy and warned that “persistent stagnation” here and abroad could add more fuel to a populist backlash against trade and immigration that would further stifle growth.

In its quarterly World Economic Outlook, the IMF significantly cut its estimate for US growth this year, to 1.6 per cent from a July estimate of 2.2 per cent.

The global economy will expand 3.1 percent this year, it said — the same as forecast in July.

The IMF described worldwide growth as “subpar,” with a slowdown in the US and other advanced economies being offset by slightly stronger output in developing and emerging nations.

“Taken as a whole, the world economy has moved sideways,” said IMF Chief Economist Maurice Obstfeld.

IMF lowers global growth outlook, pointing to China’s rocky economic shift

The report said that a stagnating global economy and the “precarious nature” of the recovery from the 2008 financial crisis risked policies that “would hamper productivity, growth and innovation.”

“It is vitally important to defend the prospects for increasing trade integration,” Obstfeld said. “Turning back the clock on trade can only deepen and prolong the world economy’s current doldrums.”

The comments were partly a reference to the policies of Republican presidential nominee Donald Trump. Trump has criticised US trade deals with Mexico and China and wants tougher immigration policies.

The IMF report didn’t mention Trump specifically. But it said that “anti-immigrant and anti-trade rhetoric have been prominent from the start of the current (US) presidential election round,” and that there has been “pressure to adopt populist, inward-looking policies” around the world, citing the recent British vote to leave the European Union as an example.

Democratic presidential candidate Bernie Sanders also was sharply critical of trade deals during the primaries. And Democratic nominee Hillary Clinton has said she does not support the sweeping Trans-Pacific Partnership trade deal negotiated by the Obama administration.

“Globally, concerns are growing about political discontent, income inequality and populist policies, threatening to derail globalisation,” the IMF said.

The IMF was created near the end of World War II to foster economic cooperation. It has 189 member countries, and its goals include facilitating international trade, improving financial stability and reducing poverty.

The downgrade in the US forecast came after “a disappointing first half caused by weak business investment and diminishing pace of stockpiles of goods,” the IMF said.

US growth is expected to improve to 2.2 per cent next year. But that’s still tepid and down 0.3 percentage points from the July estimate.

The US economy expanded at just a 1.1 per cent annual rate from January through June. Economists expect growth to rebound in the second half of the year.

Federal Reserve policymakers last month forecast the US economy would grow 1.8 per cent this year and 2 per cent in 2017.

The IMF predicted that global economic output would pick up slightly next year, expanding at a 3.4 per cent pace, boosted by recoveries in Russia and Brazil.

China’s economy, the world’s second-largest after the US, is expected to continue to slow following 6.9 per cent growth last year. The IMF forecast a 6.6 per cent expansion this year and 6.2 per cent next year.