According to the International Monetary Fund, global growth is not expected to exceed 3% in 2019, the slowest pace since the 2009 financial crisis.
The warning is final. “With growth of 3%, there is no room for political error,” warned Gita Gopinath, chief economist of the International Monetary Fund (IMF), when she announced the latest economic outlook for 2019 on Tuesday 15 October. And it calls on policy makers to reduce trade tensions “urgently”. Otherwise, there is a risk that “confidence, growth and job creation will be seriously undermined”. The friction between Washington and Beijing partly explains the new downward revision of growth forecasts for 2019.
The pace of global growth is slowing.
Overall growth is therefore not expected to exceed 3% in 2019. This is the lowest rate since the 2009 financial crisis (compared to 3.6% in 2018). This is 0.3 percentage points less than in the Institute’s last forecast in April. Among the reasons cited by the IMF are the uncertainties surrounding Brexit and the economic tensions between the world’s two major economic powers, China and the United States, which led to higher tariffs and lower corporate confidence. According to IMF calculations, trade tensions are expected to cost global growth 0.8 percentage points of GDP in 2020. And yet their impact has been cushioned by accommodating monetary policies in the United States and many other developed and emerging economies. “Without this monetary stimulus, global growth would have been 0.5 percentage points lower in 2019 and 2020,” says Gopinath.
Other more structural reasons are cited to explain this slowdown, namely low productivity growth and an aging population in developed countries. For 2020, the IMF expects a slight acceleration to 3.4%, supported by emerging markets, while activity is expected to be less dynamic in a number of countries, including Japan, the United States, Europe and China, which account for half of world GDP.
China has entered a phase of structural slowdown
After a sharp slowdown in the last three quarters of 2018, growth in the industrialized countries stabilized only slowly in the first half of 2019, says the IMF. In the rich countries it should not exceed 1.7% in 2019 and 2020. Growth in the US continued at a sustained pace in the first half of 2019, driven by strong domestic demand and a strong labor market. It is expected to reach 2.4% in 2019 before slowing to 2.1% in the following year. The Eurozone suffered more from the decline in foreign demand and the decline in corporate inventories: European GDP growth should not exceed 1.2% in 2019 before recovering slightly to 1.4% in 2020. The IMF lowered its growth forecasts for Germany and France, two countries that suffered a stronger than expected decline in exports in the first half of 2019.
The emerging and developing countries of Asia continue to be the driving forces of the global economy, says the IMF, but China has entered a phase of “structural downturn. Asia’s main economy is expected to grow by 6.1% in 2019 and by 5.8% next year compared to last April’s forecast, as the decline in exports and the consolidation of the financial sector are threatened by the rise in debt.
Commercial services at risk
The slowdown in global growth has led to a slowdown in industrial production, the index of which has been halved since early 2018. The automotive sector, which had to adapt to the new CO2 emission standards in China and the European Union, even recorded a 3% drop in global sales last year. New tariffs on US imports from China and the uncertain outcome of negotiations between Washington and Beijing prompted companies to limit or postpone their purchases of capital goods. This decline in demand for intermediate goods, which account for half of world trade, weighed on world trade, which grew by only 1% in the first half of 2019, the slowest pace since the first half of 2012.
Service activities, whose trade is less subject to the whims of world trade, resisted well, allowing the labor market to maintain its momentum and wages in industrialized countries to rise. “This divergence between manufacturing and services has been going on for an exceptionally long time, and we are concerned if and when the weakness of manufacturing could spread to services,” Gopinath said.
IMF calls for fiscal stimulus and structural reforms
In its report, the IMF lists the many risks for the global economy: high indebtedness in some countries, a stronger than expected decline in Chinese growth, the Brexit without an agreement or an intensification of the trade dispute between Washington and Beijing. To better protect the economy, the institution calls on governments to defuse trade tensions, revive multilateral cooperation and, where necessary, support economic activity. The IMF points out that the fiscal stimulus in China and the United States has helped to minimize the impact of tariff increases and recommends that countries with sufficient flexibility follow suit. Consequently, Germany says: The country should take advantage of negative interest rate loans to invest in human capital and infrastructure, not least from a cost-benefit perspective. In low-income countries, particularly sub-Saharan Africa and, to a lesser extent, the Middle East and Asia-Pacific, the institution calls for structural reforms.