The International Monetary Fund has cut its global economic growth forecasts for 2018 and 2019, saying trade policy tensions and the imposition of import tariffs are taking a toll on commerce while emerging markets struggle with tighter financial conditions and capital outflows.
The new forecasts, released in Bali where the IMF and World Bank annual meetings are getting underway, show a burst of strong growth, fuelled partly by US tax cuts and rising demand for imports, was starting to wane.
The IMF said in an update to its World Economic Outlook it was predicting 3.7 per cent global growth in both 2018 and 2019, down from its July forecast of 3.9 per cent growth for both years.
The downgrade reflects a confluence of factors, including the introduction of import tariffs between the United States and China, weaker performances by eurozone countries, Japan and Britain, and rising interest rates that are pressuring some emerging markets with capital outflows, notably Argentina, Brazil, Turkey and South Africa.
"US growth will decline once parts of its fiscal stimulus go into reverse," IMF chief economist Maurice Obstfeld said in a statement.
"Notwithstanding the present demand momentum, we have downgraded our 2019 US growth forecast owing to the recently enacted tariffs on a wide range of imports from China and China's retaliation."
With much of the US-China tariff war's impact to be felt next year, the IMF cut its 2019 US growth forecast to 2.5 per cent from 2.7 per cent previously, while it cut China's 2019 growth forecast to 6.2 per cent from 6.4 per cent.
It left 2018 growth forecasts for the two countries unchanged at 2.9 per cent for the United States and 6.6 per cent for China.
The eurozone's 2018 growth forecast was cut to two per cent from 2.2 per cent previously, with Germany particularly hard hit by a drop in manufacturing orders and trade volumes.
Obstfeld said the IMF did not see a generalised pullback from emerging markets, nor contagion that would spill over to those emerging economies that have stronger economies and have thus far avoided major outflows, such as those in Asia and some oil exporting countries.
"But there is no denying that the susceptibility to large global shocks has risen," Obstfeld said.
Brazil will see a 0.4 percentage-point drop in GDP growth to 1.4 per cent for 2018. Iran, facing a new round of US sanctions next month, also had its growth forecast cut, the IMF said.
Some energy-rich emerging market countries have fared better due to higher oil prices, with Saudi Arabia and Russia seeing forecast upgrades.
The IMF said the balance of risks was now tilted to the downside, with a higher likelihood that financial conditions will tighten further as interest rates normalise, hurting emerging markets further at a time when US-led demand growth will start to slow as some tax cuts expire.
Trade tensions are expected to continue although IMF officials view US-Mexico-Canada trade agreement as a positive sign.
