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IMF cuts global growth projections due to trade, policy tensions

The International Monetary Fund lowered its global growth projections through next year, noting in its latest World Economic Outlook report that escalating trade tensions remain one of the biggest threats to sustained growth.

Global expansion is forecast to decline to 3.7% for the rest of 2018 through 2019, 0.2 percentage point less than the IMF's April forecasts, the international organization said in the report released Oct. 9 at its Fall 2018 meeting in Bali, Indonesia.

"Escalating trade tensions and the potential shift away from a multilateral, rules-based trading system are key threats to the global outlook," the report said.

Risks to advanced economies

U.S. growth should peak at 2.9% this year, slow to 2.5% in 2019, primarily due to protectionist trade measures, and then drop to 1.8% in 2020 as the tax cut stimulus wanes, the report predicted.

Other advanced economies were already registering disappointing growth in 2018, especially those that are reliant on energy imports. The IMF revised its forecast for the euro area down by 0.4 percentage point to 2% for 2018. Brexit concerns were already included in the IMF's U.K. forecast in April, but weak growth in the first quarter of the year, primarily due to weather conditions, knocked off another 0.2 percentage points for a 2018 growth projection of 1.4% for 2018 and 1.5% in 2019.

Advanced economies should take advantage of growth and relatively accommodative monetary policy to rebuild their fiscal buffers, the IMF said. While the U.S. still is enjoying the fruits of a short-term boost from tax cuts, an inflation surprise could increase the risk of a faster-than-expected interest rate rise, leading to a still stronger U.S. dollar, with negative impacts on the global economy.

"The preferred policy course would be to increase the revenue-to-GDP ratio through greater reliance on indirect taxes," the report said.

While the U.S. economy is still growing and above full employment, monetary policy is another "potential trigger" that could tighten market conditions, the IMF noted.

If the return to normal monetary policy is suddenly accelerated, markets could be in for a shock, the IMF warned. Markets are predicting fewer rate rises than projected by the Federal Reserve, so unexpectedly high inflation readings could see investors "abruptly reassess risks" the report said.

"Tighter financial conditions in advanced economies could cause disruptive portfolio adjustments, sharp exchange rate movements, and further reductions in capital inflows to emerging markets, particularly those with greater vulnerabilities," it said.

Vulnerable emerging economies

China's growth is projected to moderate from 6.9% 2017 to 6.6% in 2018 and 6.2% in 2019, the IMF said, a 0.2 percentage point downgrade for 2019 from the April WEO, mostly attributable to recent tariffs. The IMF also said it expected the impact to be partially offset by policy stimulus.

Public and corporate debt at near-record levels around the world, could also "expose vulnerabilities that have built up over the years, dent confidence and undermine investment—a key driver of the baseline growth forecast," the report concluded.

Some of those shifts have already been evident this year in emerging market economies like Argentina, Iran, Brazil and Turkey, though some of that dynamic was caused by country-specific factors, including local politics, the IMF said. Turkish President Recep Tayyip Erdoğan has indicated a willingness to meddle with central bank authority, and that, coupled with political tensions with the U.S. and a generally deteriorating economy, made Turkey a prime example of how risks can affect a vulnerable emerging market, the IMF said. The Turkish lira is down nearly 38% against the dollar so far this year.

Argentina, which earlier this year arranged a $50 billion stand-by arrangement with the IMF, came back last month to ask for an increase in its credit line to $57 billion. Meanwhile, Brazil is in the midst of a contentious presidential election with candidates representing opposite ends of the political spectrum forced into a run-off vote at the end of this month.

Currencies in a number of emerging markets, including Turkey and Brazil, were hit hard by global and local events, as well as the strong U.S. dollar, leading to capital outflows, after experiencing inflows at the year's start. Mexico's peso, however, stabilized after worries about policy shifts following its presidential election eased and a new trade agreement was struck with the U.S. The peso is up 3.9% against the dollar year-to-date.