Published: Fri, October 12, 2018
Business | By Eloise Houston

International Monetary Fund warns of broad ‘market correction’ from global trade tensions

International Monetary Fund warns of broad ‘market correction’ from global trade tensions

The fund downgraded its forecast for United States growth next year to 2.5 per cent, down 0.2 percentage point from July, after factoring in the impact of tariffs imposed by the Trump administration and retaliatory duties by other nations.

China's economy could also take a hit: The IMF revised its forecast for economic growth in 2019 down to 6.2 percent, slightly lower than previous estimates and down from 6.6 percent this year.

The IMF expects the US economy to grow 2.9 percent this year, the fastest pace since 2005 and unchanged from the July forecast.

The financial market volatility will likely continue next year, because the US Federal Reserve, after raising the federal funds rate by 25 basis points in its September 26 meeting, nonetheless signaled another rate hike by the end of this year and maintained its projection for three rate hikes in 2019.

The fund expects USA economic expansion to peak at 2.9 per cent this year and start to slow down next year as the economic stimulus introduced in the wake of the 2008 global credit crisis begins to wind down and tariff impact begins to hurt.

Rebuilding Fiscal Buffers It noted that public debt has increased in emerging markets over the past decade, and is projected to increase further in numerous largest economies over the next five years.

The cut its 2019 United States growth forecast to 2.5 percent from 2.7 percent previously, while it reduced China's 2019 growth forecast to 6.2 percent from 6.4 percent.

The IMF, in the WEO report, said inflation pressures in sub-Saharan Africa had broadly softened, with annual inflation projected to drop to 8.6 per cent in 2018 and 8.5 per cent in 2019, from 11 per cent in 2017.

"It was a combination of factors that basically affected emerging and frontier markets".

Despite some cause for positivity however, the International Monetary Fund has also suggested Switzerland's economy may slow down next year.

The IMF report said "protectionist rhetoric" was being "increasingly turned into action", warning such uncertainty "could lead firms to postpone or forgo capital spending and hence slow down growth in investment and demand". Indonesia has been swept up in the market turmoil triggered by rising USA interest rates and a stronger dollar, which has pushed the rupiah down 11 percent this year. "We do have instruments to actually measure the external-sector situation, and we hope that the recommendations that we have given to China, in terms of letting the currency fluctuate, will continue to be approved and agreed and implemented by China".

"A further escalation of trade tensions, as well as rising geopolitical risks and policy uncertainty in major economies, could lead to a sudden deterioration in risk sentiment, triggering a broad-based correction in global capital markets and a sharp tightening of global financial conditions", the International Monetary Fund said.

It cited Australia, New Zealand and Britain as countries that are taking positive steps to better manage their assets against the growth of future liabilities.

While the damage from an all-out trade war wouldn't be catastrophic, slow growth can also pose problems.

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