RiskJanuary 23, 2020

Negative Surprises Spurs IMF to Cut Global Growth Forecast

IMF sees few signs of a turning point amid ‘new normal’ of higher uncertainty.

Reported by Michael Katz

The International Monetary Fund (IMF) has downgraded its global growth outlook for 2019, 2020, and 2021 to reflect “negative surprises” to economic activity in certain emerging market economies, and said “few signs of turning points are yet visible in global macroeconomic data.”

Global growth is now projected to increase from an estimated 2.9% in 2019 to 3.3% in 2020 and 3.4% for 2021. That is a downward revision of 0.1 of a percentage point for 2019 and 2020, and 0.2 for 2021 compared with the IMF’s October World Economic Outlook (WEO).

“The reality is that global growth remains sluggish, which makes it harder for countries to boost incomes and living standards,” said IMF Managing Director Kristalina Georgieva at a press conference at the World Economic Forum in Davos, Switzerland. “Above all, we are all adjusting to the new normal of high uncertainty.”

She said that although the so-called “phase one” agreement between the US and China is “good news,” the underlying causes of trade tensions and the fundamental issues of trade reform still exists.

“In the first weeks of the new year, we have witnessed increased geopolitical tensions in the Middle East, and we have seen the dramatic impact of climate shocks-in Australia and parts of Africa,” she said. “So, here is our main message: While in October we were able to sum up our economic forecast in two words – ‘synchronized slowdown’ – we now have four words: ‘Tentative Stabilization, Sluggish Recovery.’”

The outlook wasn’t entirely negative. The IMF said that market sentiment has been boosted by tentative signs, such as a bottoming out of manufacturing activity and global trade, a broad-based shift toward accommodative monetary policy, “intermittent” favorable news on US-China trade negotiations, and diminished fears of a no-deal Brexit.

It also said that despite weaker baseline growth projection, developments since the fall of 2019 indicate a set of risks to global activity that is “less tilted to the downside” compared to the October outlook.

“These early signs of stabilization could persist and eventually reinforce the link between still-resilient consumer spending and improved business spending,” said the IMF in its report. “Additional support could come from fading idiosyncratic drags in key emerging markets coupled with the effects of monetary easing.”

Nevertheless, the IMF said “downside risks remain prominent,” including rising geopolitical tensions between the US and Iran, intensifying social unrest, further worsening of relations between the US and its trading partners, and deepening economic frictions between other countries.

“A materialization of these risks could lead to rapidly deteriorating sentiment, causing global growth to fall below the projected baseline,” said the report.

The global growth trajectory reflects a sharp decline followed by a return closer to historical norms for a group of underperforming and stressed emerging market and developing economies. Those include Brazil, India, Mexico, Russia, and Turkey. The growth forecast also relies on relatively healthy emerging market economies maintaining their robust performance even as advanced economies and China continue to gradually slow down.

The IMF said growth in the US is expected to moderate to 2% in 2020 from 2.3% in 2019, and decelerate further to 1.7% in 2021, which is 0.1 of a percentage point lower than the October outlook.

In the euro area, growth is forecast to rise to 1.3% in 2020 from 1.2% in 2019, a downward revision of 0.1 percentage point from October, and 1.4% in 2021. The projections for France and Italy remain unchanged from October, but have been reduced for 2020 in Germany, where manufacturing activity remains in contraction territory, and for Spain due to carryover from a stronger-than-expected deceleration in domestic demand and exports in 2019.

In the UK, growth is expected to stabilize at 1.4% in 2020 and rise to 1.5% in 2021, which is unchanged from the October outlook. This assumes, however, an orderly exit from the European Union at the end of January followed by a gradual transition to a new economic relationship, neither of which is a sure thing.

Japan’s growth rate, meanwhile, is projected to slow to 0.7% in 2020 from an estimated 1% in 2019, which is 0.1 and 0.2 of a percentage point higher, respectively, from the October forecast. The IMF said the upward revision to estimated 2019 growth reflects healthy private consumption.

For emerging markets and developing economies, the IMF forecast growth to increase to 4.4% in 2020 and 4.6% in 2021, which is 0.2 of a percentage point lower for both years than in the October outlook.

The growth forecast for the group reflects a combination of projected recovery from deep downturns for stressed and underperforming emerging market economies, and an ongoing structural slowdown in China, said the IMF.

“In some ways, the beginning of the 2020s is eerily reminiscent of the 1920s,” said Georgieva. “Think of high economic inequality, the rapid spread of new technologies, and the huge risks and rewards of finance. All these issues require stronger cooperation within and across nations.”