The IMF downgrades its forecasts for the global economy. Again
After Welcoming the St Louis Blues, a championship-winning ice-hockey
team, to the White House on October 15th, President Donald Trump fondly
recalled a recent triumph of his own: last week’s tentative trade deal with
China. Simply put, America will impose no further punitive tariffs on Chinese
imports if China promises to buy American farm goods worth billions of
dollars. How many billions? “It’s very big numbers,” Mr Trump emphasised.
“I said, ‘Ask for 70.’…My people said, ‘All right, make it 20.’ I said, ‘No, make
it 50.’”
Will this carefully calibrated amount ever materialise? China does not want
to pay over the odds or deprive other, friendlier suppliers of its custom. It
also wants America to go beyond promising no new tariffs and to start
removing existing ones. The deal may unravel before it is written down, let
alone signed by the two countries’ leaders next month at the Asia-Pacific
Economic Co-operation forum in Santiago.
That unpredictability is a problem. Not just higher tariffs but “prolonged
trade-policy uncertainty” are damaging the world economy, said Gita
Gopinath, the IMF’s chief economist, this week as the fund again cut its
forecast for global growth. “Manufacturing firms have become more cautious
about long-range spending and have held back on equipment and machinery
purchases,” the fund notes. The fog of trade war is depressing investment
spending. And because machinery, equipment and other capital goods are
often imported, weak investment spending is further hurting trade. The IMF
now expects the world economy to expand by just 3% this year, compared
with 3.6% last year. That would be the slowest rate in the decade since the
global financial crisis.
Both America and the euro zone are expected to grow more slowly this year
than the fund had envisaged in July, before trade tensions escalated. India’s
prospects have dimmed sharply: it is forecast to grow by 6.1% rather than the
7% expected only months ago. And in 2020 China is now projected to expand
by less than 6% for the first time in 30 years.
The fund has, unsurprisingly, slashed its forecast for Hong Kong. The city is
now expected to grow by only 0.3%, compared with the 2.7% foreseen in
April, before its economic prospects vanished in a cloud of tear-gas. The
unrest could also jeopardise the fragile trade truce between America and
China. On October 15th the House of Representatives passed a measure
enjoining America to assess Hong Kong’s autonomy annually and sanction
officials who violate it. China reacted angrily to what it describes as meddling
in its affairs.
The IMF’s economists
have valiantly tried to
quantify the damage to
the world economy from
the trade war if Mr
Trump’s putative deal
falls apart. The direct
impact is surprisingly
modest. The tariffs
already in place and in
the pipeline could reduce
America’s GDP by just
over 0.2% next year,
compared with a world
in which the trade war
had never started (see
chart). More harmful are
indirect effects: weaker
business confidence,
productivity and riskappetite
on financial
markets. These bring the damage to almost 0.6% of America’s GDP in 2020.
The damage to China would be almost 2% of its GDP.
These are small percentages—but of vast economies. If the IMF is right, an
unresolved trade war could cost America roughly $125bn of forgone output
next year alone. The cost to China could exceed $300bn (at market exchange
rates). Big numbers indeed.
Source: The Economic Times, India Thursday, 24 October 2019