World economy forecast to slow in 2019 amid trade tensions

The world economy absorbed more bad news Monday

The International Monetary Fund (IMF) cut its growth forecast for 2019. And China, the world’s second-biggest economy, said it had slowed to its weakest pace since 1990.

The IMF cut its estimate for global growth this year to 3.5 per cent, from the 3.7 per cent it had predicted in October and down from 2018’s 3.7 per cent. The fund cited heightened trade tensions and rising interest rates.

“After two years of solid expansion, the world economy is growing more slowly than expected, and risks are rising,” said IMF Managing Director Christine Lagarde as she presented the forecasts at the World Economic Forum in Davos, Switzerland.

The IMF is not alone in its pessimism. The World Bank, the Organization for Economic Cooperation and Development, and other forecasters have also downgraded their world growth estimates.

Among the key concerns is the Chinese economy. The country is slowing just as its leadership tries to turn it into a more modern economy by reducing its reliance on manufacturing and exports and increasing consumer spending.

The country reported Monday growth of 6.6 per cent in 2018, the weakest since 1990. Demand for Chinese exports weakened last year, and the IMF expects China’s growth to decelerate again this year – to 6.2 per cent.

The IMF left its prediction for US growth this year unchanged at 2.5 per cent – though a continuation of the partial 31-day shutdown of the federal government poses a risk.

The IMF trimmed the outlook for the 19 countries that use the euro as their currency to 1.6 per cent from 1.8 per cent. Germany got a big downgrade from the IMF, the result of weaker demand for German exports and problems in the country’s auto industry.

Britain’s messy divorce from the European Union and Italy’s ongoing financial struggles also pose threats to growth in Europe.

Emerging-market countries are forecast to slow to 4.5 per cent from 4.6 per cent in 2018. That is partly a result of China’s deceleration, which pinches developing countries that supply it with raw materials such as copper and iron ore.

“China’s growth slowdown could be faster than expected, especially if trade tensions continue, and this can trigger abrupt sell-offs in financial and commodity markets” – something that happened when Chinese growth sputtered in 2015, said IMF chief economist Gita Gopinath.

Under President Donald Trump, the United States has imposed import taxes on steel, aluminium and hundreds of Chinese products, drawing retaliation from China and other US trading partners.

“Higher trade uncertainty will further dampen investment and disrupt global supply chains,” Gopinath said.

Rising interest rates in the US and elsewhere are also pinching emerging-market governments and companies that borrowed heavily when rates were ultra-low in the aftermath of the 2007-2009 Great Recession.

As the debts roll over, those borrowers have to refinance at higher rates. A rising dollar is also making things harder for emerging-market borrowers who took out loans denominated in the US currency.