The world’s economy is growing more slowly than anticipated – forcing a downgrade of global growth rates, according to head of the International Monetary Fund Christine Lagarde.
Ms Lagarde told delegates at this week’s World Government Summit in Dubai that the IMF has revised its global growth outlook for 2019 and 2020, downgrading forecasts by 0.2% and 0.1% to 3.5% and 3.6% respectively, in light of rising trade and geo-political tensions as well as tighter global credit conditions.
The new figures also include a less optimistic forecast for world trade overall – the IMF expects trade volume to grow 4% this year, the same it achieved in 2018 and down from the 5.3% growth in 2017.
“It is not a major revision but the level of risk and the acceleration of the pace at which risks are eventually materialising has definitely changed in the last six months,” Ms Lagarde said.
“Half a year ago, there were threats and concerns, but they were not of the magnitude that we have now and that has resulted in instability and volatility.”
She said Germany’s predicted growth, in particular, was downgraded by 0.6%.
“It is quite a big number, and it is due to some local and endogenous reasons relating to the ability of Germany’s automotive industry to cope with the various scandals that have hit that sector, how the industry will adjust to new regulations, how electric vehicle technology will precipitate change,” she said.
“Some of these factors will go away but Europe is lower [than China] in terms of our forecast and there are clear uncertainties on the horizon.”
The four clouds
Ms Lagarde referred to “four clouds” or factors undermining economic progress – namely Brexit uncertainty, trade tensions and tariff escalations, global financial tightening and an accelerated slow-down in the Chinese economy.
Not addressing the risks posed by each cloud could create the “perfect economic storm”.
“We have big risks on the horizon and the clouds that we have signalled about [12 months ago] are getting darker by the day,” she said.
Brexit outcome uncertainty
Ms Lagarde said that the global economy is being stymied mainly by ongoing uncertainty relating to Britain’s impending departure from the European Union on 29 March.
The increasing possibility of a no-deal Brexit – where Britain would fail to conclude a withdrawal agreement and crash out of the EU with no transition period – could have serious consequences which will serve to impede global economic growth figures.
If a withdrawal agreement is reached by the end of March, a transition period would see the UK break away from the EU, leaving a messy to-do list of negotiations relating to the future relationship between both parties.
“A no-deal scenario is obviously the worst case and anything short of that would be better but would also considerably hurt the UK economy,” she said.
“Whether there is a smooth exit or a brutal one on March 29 without extension of notice, [the economy] is not going to be as good as it is now because [Brexit] will add additional friction and difficulties across the board.
“Of course, we have no idea how it is going to pan out but it is certainly beginning to have an effect in the context of an economy around the world which is in transformation.”
Trade tensions and tariff escalations
In June, Ms Lagarde told delegates at the G7 Summit in Canada that the “biggest and darkest cloud” over the global economy hangs over the US and China.
She said brewing trade tensions created by the world’s two biggest economies carries the risk of eroded confidence “by attempts to challenge the way in which trade has been conducted, in which relationships have been handled, and the way in which multilateral organisations have been operating”.
The tensions relate specifically to a full-scale tariff war first launched when the US imposed duties on $250 billion of Chinese goods and threatened to add more, and cemented when China retaliated with its own duties on US imports.
“We have a big elephant in the room with [these countries] trying to come to terms with the substantive issues of international property, state-owned enterprises, subsidies and the quantitative issues of how the balance of trade between the two countries will be settled in a satisfactory way,” she said.
“The outcome of discussions between China and the US is uncertain, the time is short and the problems that they are trying to deal with are monumental in my view.”
Also having an impact is slow progress on a renegotiated North America Free Trade Agreement, awaiting full ratification by the US, Mexico and Canada.
“Political determination for the common good would help a great deal – a lot of it is in the hands of those who are engineering those issues,” Ms Lagarde said.
“I don’t think it is just one party or the other – [there needs to be] a strong willingness in all corners to clarify and resolve the issues.”
Global financial tightening
Lagarde also pointed to the risks posed by rising borrowing costs within a context of “heavy debt” racked up by governments, firms and households.
Her message was similar to one she delivered at the University of Hong Kong in April, where she told audience members about the bottom line of high debt burdens.
“They leave governments, companies, and households more vulnerable to a sudden tightening of financial conditions… this potential shift could prompt market corrections, debt sustainability concerns and capital flow reversals in emerging markets,” she said.
While monetary tightening can be a sign that growth is coming back, it can come at a high cost to enterprises.
“When there are too many clouds, it only takes one lightning bolt to start the storm,” she said.
Chinese economy slowdown
The IMF has not reviewed its growth outlook for China, which remains steady at 6.2% as a result of the Chinese government delivering a fine balance of credit tightening and economic stimulus initiatives.
This is despite the country entering a phase of “accelerated slowdown”.
Figures for the three months to December 2018 show the Chinese economy grew by 1.5% quarter-on-quarter in line with market estimates, compared to a 1.6% expansion in the previous period – signalling the weakest pace of quarterly expansion since the first quarter of 2018.
Year-on-year, the economy advanced 6.4% in the December quarter of 2018, after a 6.5% growth in the previous quarter to match market expectations.
It was the lowest rate since the global financial crisis, amid the intense US trade dispute and weakening domestic demand.
Latest figures reveal the trade dispute is already taking its toll, with China’s exports falling by a sharp 4.4% in December and imports dropping 7.6%.
Likewise, for the 2018 year, the economy expanded just 6.6% – the weakest pace on record since 1990.
Given that China is the world’s second largest economy, its slowdown is expected to have a ripple effect across the world, particularly in Australia.
Christine Lagarde’s full speech at the World Government Summit 2019: