US-China trade war caused ‘self-inflicted’ damage to the global economy, says IMF after third 2019 forecast cut
- International Monetary Fund (IMF) reduced its 2019 world growth forecast down to 3.2 per cent, 0.1 percentage point below its previous outlook released in January
- Trade tensions between Beijing and Washington have continued for over a year despite the latest truce agreed by Donald Trump and Xi Jinping at the G20 summit
China’s trade war with the United States has caused “self-inflicted” damage that has already made global growth “sluggish and precarious” and could create further financial vulnerabilities by depressing both consumer and business sentiment, the International Monetary Fund has warned.
The Washington-based organisation revised its 2019 global growth forecast down to 3.2 per cent, 0.1 percentage points below its previous outlook released in January, and the third cut in its forecast for this year. In April, the International Monetary Fund (IMF) reduced its forecast by 0.2 percentage points, the same cut seen in January.
Global growth will improve to 3.5 per cent in 2020, according to the IMF, but it warned that the forecast was “precarious, presuming stabilisation in currently stressed emerging markets and developing economies and progress towards resolving trade policy differences.”
China, the world’s second largest economy, has been the target of increased tariffs by US President Donald Trump for over a year, with US$250 billion Chinese goods now covered by 25 per cent levies.
US growth, despite China’s imposition of retaliatory tariffs, was revised up by 0.3 percentage point to 2.6 per cent this year, but is projected to slow to 1.9 per cent in 2020 as fiscal stimulus wanes.
Moreover, the negative impact of the trade war will rise over time, the fund warned. The combined effect of the tariffs the world’s two largest economies have imposed on each other over the last year could reduce global growth by 0.5 per cent in 2020, it said.
The IMF expressed concern that the negative effects of escalating tariffs and weakening external demand could pile pressure on the Chinese economy, which is already slowing due in large part to structural obstacles and the effects of the government’s plan to reduce debt and rein in risky lending.
The first quarter GDP in China was stronger than forecast, but indicators for the second quarter suggest a weakening of activity
“The first quarter GDP in China was stronger than forecast, but indicators for the second quarter suggest a weakening of activity,” it said.
China is widely expected to implement a further modest increase in fiscal stimulus and marginal easing of monetary policy in the second half of 2019, if growth approaches the floor of its target range.
The IMF argued that negotiations, rather than use of tariffs, was the best way for the US and China to solve their trade issues.
“Countries should not use tariffs to target bilateral trade balances,” the IMF said. “The pressing needs are, first, to reduce trade and technology tensions.”
“Policymakers should cooperatively address these gaps and strengthen the rules-based multilateral trading system, including by ensuring continued enforcement of existing World Trade Organisation (WTO) rules through a well-functioning WTO dispute settlement system, [and] resolving the deadlock over its appellate body.”
The US has been blocking appointments to the WTO’s Appellate Body, which hears appeals in trade disputes brought by WTO members. The Trump administration has accused the body of overreach, and unless the block is lifted, there will be just one member left on the Appellate Body by December, with three required to hear disputes, effectively hamstringing its ability to function.
