Escalating, sustained trade conflicts following US tariff actions threatened to derail economic recovery and depress medium-term growth prospects, the International Monetary Fund warned.
Sketching out potential damage from the full brunt of US President Donald Trump's threats and subsequent retaliation from trading partners yesterday, the IMF said that if realised, they could reduce annual global economic output by 0.5 per cent from projections for 2020.
That translates to nearly $500 billion in lost annual output based on IMF projections, the equivalent of subtracting an economy the size of Thailand.
“The risk that current trade tensions escalate further with adverse effects on confidence, asset prices and investment is the greatest near-term risk to global growth,” IMF Chief Economist Maury Obstfeld told a news conference, noting US trade deficits were likely to grow due to high demand, possibly inflaming trade tensions further.
The reduction in output takes into account active US global tariffs on steel and aluminium, as well as an initial $34 billion in Chinese goods, along with retaliatory measures. Other threats, including another round of tariffs on an additional $200 billion in Chinese goods and a 25 per cent US global tariff on car imports now under study, are also included.
“As the focus of global retaliation, the United States finds a relatively high share of its exports taxed in global markets in such a broader trade conflict, and it is therefore especially vulnerable,” Mr Obstfeld added.
The IMF left unchanged its global economic growth forecasts at 3.9 per cent for 2018 and 2019, compared to its previous forecast issued in April. Mr Obstfeld said these projections only take into account tariffs in force, so larger actions such as possible automotive tariffs were not included.
Still, he said growth momentum was slowing. While the IMF in April rounded down growth projections to reach the 3.9 per cent forecast, for the July update, the numbers were rounded up slightly to reach that same level.
Forecasts for the US and China were both unchanged, with US growth pegged at 2.9 per cent in 2018 and 2.7 per cent in 2019. China’s growth was forecast at 6.6 per cent in 2018 and 6.4 in 2019.
But the fund cut its 2018 growth forecasts for eurozone countries and Japan and Britain, citing a softer-than-expected first-quarter performance coupled with tighter financial conditions partly due to political uncertainty.
The eurozone’s 2018 growth forecast was cut to 2.2 per cent from 2.4, with Britain cut to 1.4 per cent from 1.6. Japan’s growth projection was cut to 1.0 per cent from 1.2. The IMF also trimmed 2018 forecasts for some emerging market countries, notably a half percentage point cut for Brazil to 1.8 per cent due to the lingering effects of labour strikes and political uncertainty.