US, China trade war could dent economic growth

Kenny Grant
October 12, 2018

The International Monetary Fund (IMF) has warned an escalation in trade tensions between the USA and China could lead to a global financial crisis.

The IMF said in an update to its World Economic Outlook it was now predicting 3.7 percent global growth in both 2018 and 2019, down from its July forecast of 3.9 percent growth for both years.

Saudi Arabia, the biggest Arab economy which contracted 0.9 per cent previous year, will expand 2.2 and 2.4 per cent in 2018 and 2019, 0.3 and 0.5 percentage points higher than the July forecast.

The IMF's baseline forecast for the global economy is 3.7% growth in 2018, 2019 and 2020.

Pakistan Finance Minister Asad Umar, who is attending the Fund's annual meeting in Bali, announced earlier this week that the government would seek talks with the IMF on a "stabilisation recovery programme".

The IMF expects the U.S. economy to grow 2.9 per cent this year, the fastest pace since 2005 and unchanged from the July forecast.

The rapid build-up in debt in China in recent years also is a concern, although Chinese authorities have taken steps to rein in debt growth, he said.

The UK economy is expected to grow by 1.4% this year - down from April's prediction of 1.6% - while predicted growth for 2019 remains at 1.5%, a slowdown from 1.7% in 2017.

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Growth estimates for the euro area and Britain were also revised down with the report warning that growth "may have peaked in some major economies".

The IMF's deputy director, Research, Gian Milesi-Ferretti, blamed the drag on Africa's economic development and growth on the poor economic development of the largest economies on the continent, including Nigeria. For the record, the International Monetary Fund has lowered the growth projections for both India and China by 0.4 per cent and 0.32 per cent, respectively, from its annual April's World Economic Outlook.

Elsewhere, the IMF said a key risk to financial conditions was if the Federal Reserve tightened monetary policy faster than market expectations.

In the report, the International Monetary Fund said economic growth appears to have peaked in some major economies while the gap between advanced countries and emerging markets was widening. The report said that aggregate growth in the emerging market and developing economy group stabilised in the first half of 2018. Global growth will slow to 3.6 per cent by 2022-2023, as growth in rich nations falls back to potential, it said.

The risk of a global financial crisis initiated by sharp capital outflows in emerging markets due to the divergence of monetary policies in the United States and developing countries remains small but will grow as the Federal Reserve continues to raise its interest rates, as it is expected to do this year and next.

The fund left its 2018 United States forecast unchanged but cut its expectation for next year, citing the impact of the trade conflict.

"Growth performance varies, however, across countries".

Trump has repeatedly touted Wall Street record highs as proof of the success of his policies and confrontational trade strategy, and frequently criticises the Fed for gradually raising interest rates, which could squeeze the brakes on equity markets.

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