For the first time in two years, the International Monetary Fund expressed skepticism for global growth in the coming years as the organization cut its forecast for economic growth in 2018 and 2019, citing escalating trade wars as the prime disruptor.
“There are clouds on the horizon. Growth has proven to be less balanced than we had hoped,” saidIMF Chief Economist Maurice Obstfeld. “Not only have some downside risks we identified in the last WEO been realized, the likelihood of further negative shocks to our growth forecast has risen.”
According to the IMF, both the United States and China would feel the implications of the tit-for-tat tariff war between the two economic superpowers starting next year. Furthermore, rising interest rates will also divert investment capital from emerging markets, causing further pain abroad.
The IMF is expected to meet this week in Bali, Indonesia for its annual meetings with trade wars and the Federal Reserve’s tightening monetary policy being main topics of discussion. The IMF’s global growth outlook comes as U.S. equities have been feeling downward pressure as of late with rising Treasury yields dominating the financial news.
“A catalyst like earnings will give investors something to look forward to but right now it’s just a continuation of negative news for equities, with higher yields and slowing global growth,” said Peter Cardillo, chief market economist at Spartan Capital Securities in New York.
A white paper published by China last month revealed that the country can economically withstand the effects of a long, drawn-out trade war with the United States, but it took extra measures for preparation when the Chinese central bank cut the amount of reserves held by banks.
The move was announced on Sunday when the People’s Bank of China instituted a 100 basis points cut to the reserve requirement ratio for a majority of banks, resulting in a capital injection of 750 billion yuan or $109.2 billion to help shore up the banking system. The central bank confirmed that this latest policy move was done in accordance with the pace of the economy as opposed to an accommodative move.
Nonetheless, the words alluding to resiliency may be just that, according to some experts and that the situation is more dire than China is leading the markets to believe.
“China is probably facing its worst period since the global financial crisis. All news is against it,” said Fraser Howie, an independent analyst who has covered China and its financial system.
“They certainly want to play down any talks of panic or near panic … but they’re clear it’s not business as usual in China,” Howie added.
If the current tariff-for-tariff tradeoff between the United States and China resembles a mere scuffle, multinational investment bank J.P. Morgan expects it to escalate into a full-blown trade war. Just recently, the firm lowered its ratings for Chinese stocks from neutral to overweight, citing that the trade wars will heighten to a point where its economy is substantially impacted.
Last month, U.S. President Donald Trump announced his administration was moving forward with imposing a 10% tariff on $200 billion worth of Chinese goods that includes a step-up increase to 25% by the end of the year. The administration moved forward with the tariffs despite both economic superpowers in the midst of scheduled trade talks to ease tariff tensions.
In less than 24 hours, China responded with $60 billion worth of tariffs on U.S. goods, which began on Sept. 24. The new round of tariffs from China are said to affect a list of 5,207 products within a range of 5 to 10% as both the U.S. and China have already slapped each other with tariffs worth $50 billion total.
The IMF estimates that the ongoing effects of trade wars could cause global output to slide by more than 0.8% in 2020 and come under 0.4% below its trend line in the long term view. Furthermore, IMF predicts that China’s output could fall by more than 1.6% and over 0.9% in the U.S. in 2019.
“IMF’s downgrade just goes to show how the tariff dispute between U.S. and China is beginning to take its toll on the global economy,” said Cardillo.