IMF downgrades global growth forecast
The institution, which has 189 member states, expects growth of only 3 per cent this year, a 0.2 percentage-point downgrade since July, and 3.4 per cent next year, a 0.1-point downgrade. Britain does not escape the decline, with growth cut from 1.3 per cent to 1.2 per cent this year. For next year, the forecast was held at 1.4 per cent.
The UK remains the third fastest growing G7 advanced country this year, equal with France and behind the United States and Canada. However, growth would have been weaker were it not for Sajid Javid’s £13.8 billion spending giveaway, the fund said.
The IMF, which was established in 1944 to manage the global financial system, updated its forecasts in advance of this week’s annual meetings of finance ministers and central bank governors in Washington. They will discuss policy options in an attempt to coordinate a better global outlook. The forecasts underpin the agenda for the meetings and set the tone for the months ahead.
The IMF said that the world economy has been slowing since the second quarter of last year as manufacturing industries have slumped across most regions. Services have held up but it questioned whether they were beginning to show signs of strain, too. Gita Gopinath, the IMF’s chief economist, said: “Subdued growth is a consequence of rising trade barriers; elevated uncertainty surrounding trade and geopolitics; idiosyncratic factors causing macroeconomic strain in several emerging market economies; and structural factors, such as low productivity growth and ageing demographics in advanced economies.”
The picture could have been worse. If it wasn’t for extremely loose monetary policy, with recent interest rate cuts in the eurozone and the US, “global growth would be lower by 0.5 percentage points in both 2019 and 2020”, Ms Gopinath added.
Central bank support has offset some of the effects of America’s trade war with China, which the IMF estimates will have knocked about 0.8 per cent off the level of world output by next year. It added that the slight growth pick-up in 2020 is fragile as it is based on improvement among a small group of distressed emerging market economies, including Turkey, Iran and Argentina.
That group accounts for “about 70 per cent of the projected 2020 pickup in global growth”, the IMF said. Prospects could get worse if there is an escalation in the trade wars or a no-deal Brexit. “Downside risks to the outlook are elevated,” it said.
Britain’s GDP would have been downgraded had it not been for the chancellor’s spending round stimulus in September. “The projection for both years reflects the combination of a negative impact from weaker global growth and ongoing Brexit uncertainty and a positive impact from higher public spending announced in the recent Spending Review,” the IMF said.
Its projections are based on “an orderly exit from the European Union followed by a gradual transition to the new regime”. It warned that “the ultimate form of Brexit remains highly uncertain”. In April it said that a no-deal Brexit would risk a two-year recession that would result in the economy being 3.5 per cent smaller in 2021 than otherwise expected.
While accepting that the “extra public spending [announced in September] should mitigate the cost of Brexit for the economy”, it urged the government not to lose sight of the public finances. “Continued efforts to bring down the debt ratio remain important to build barriers against future shocks,” the fund said.
The focus on spending should be on infrastructure and boosting labour skills to help “those adversely affected by Brexit”. Mr Javid plans to announce an “infrastructure revolution” in the budget next month.
The IMF reserved particular criticism for Germany, which is running a budget surplus, saying that it “should take advantage of negative borrowing rates to invest in social and infrastructure capital, even from a pure cost-benefit perspective”.