IMF trims global growth forecast

The global growth forecast for 2020 and 2021 has been reduced owing to rising geopolitical tensions, climate change and slowdowns in emerging markets.

David Sapsted

20 January 2020

The International Monetary Fund (IMF) slightly reduced its global growth forecast for 2020 in a report published to coincide with the start of the World Economic Forum in Davos.The IMF cited a sharper-than-expected slowdown in India and other emerging markets, the threat of further trade sanctions by the US, social unrest in the Middle East and elsewhere, and the climate emergency, as problems that would limit a global recovery over the next two years.

US-China relationship affects global growth

In its half-yearly update, the Washington-based IMF said the trade war between the US and China had affected growth last year. It estimated the global economy would grow by 3.3 per cent this year and 3.4 per cent in 2021 – both marginally down from its last forecast.However, it said the recent US-China deal was a "tentative" sign that the slump in trade and manufacturing activity might soon bottom out.“These early signs of stabilisation could persist and eventually reinforce the link between still-resilient consumer spending and improved business spending,” the IMF said.

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But the report added, “Rising geopolitical tensions, notably between the US and Iran, could disrupt global oil supply, hurt sentiment and weaken already tentative business investments.“Moreover, intensifying social unrest across many countries – reflecting in some cases, the erosion of trust in established institutions and lack of representation in governance structures – could disrupt activity, complicate reform efforts and weaken sentiment, dragging growth lower than projected.”

Forecast trends around the world

The IMF upgraded China’s 2020 growth forecast 0.2 percentage point to 6.0 per cent because the US trade deal included a partial deal on tariffs, but the forecast for America itself was reduced by 1 percentage point to 2 per cent because of the fading effects of the stimulus resulting from 2017 tax cuts and the Federal Reserve’s monetary easing.Eurozone growth also was marked down 0.1 percentage point to 1.3 per cent for 2020, largely due to a manufacturing contraction in Germany and faltering domestic demand in Spain.The UK is expected to grow modestly and in line with the IMF’s previous forecast of 1.4 per cent this year and 1.5 per cent in 2021. This estimate assumed an orderly exit from the EU and a smooth transition to a new trading relationship with the bloc from 2021.

Threats to growth

According to the IMF, the main threat to its forecasts came from the growing costs of the climate crisis and continuing use of sanctions on trading partners by the US. It also cited political wrangling between the US and Iran, and the potential for social unrest to spread across the Middle East.“Weather-related disasters such as tropical storms, floods, heatwaves, droughts, and wildfires have imposed severe humanitarian costs and livelihood loss across multiple regions in recent years," said the report.“Climate change, the driver of the increased frequency and intensity of weather-related disasters, already endangers health and economic outcomes, and not only in the directly affected regions.“It could pose challenges to other areas that may not yet feel the direct effects, including by contributing to cross-border migration or financial stress (for instance, in the insurance sector). A continuation of the trends could inflict even bigger losses across more countries.”