For the IMF, global growth is becoming “less equitable

The effects of trade tensions should, so far, remain contained, according to the multilateral institution in its latest forecasts.

The world may well be talking about the risks to the economy of the sharp rise in trade tensions. The figures do not show that. At least for now. The International Monetary Fund’s (IMF) new forecast, presented on Monday 16 July, projects global growth to reach nearly 4% in 2018 and 2019. This figure – + 3.9% to be exact – has not changed one iota since the IMF the last forecast in April.

The institution thus maintains its scenario in spite of the protectionist salvos launched, meanwhile, by the United States against all its major partners (European Union, China, Canada, Mexico…), which immediately retaliated. The negative effects of the measures announced and to come should be contained, according to the IMF, since “so far, they affect only a tiny share of world trade.” Moreover, the impact on sentiment in financial markets should be “limited,” the Fund continues.

The fact remains that the threats of a break-up are there. The commercial battle, if it continues and intensifies, “could derail the recovery and reduce medium-term growth projections,” the institution warns. By increasing uncertainty, it risks undermining investment, which has been and remains, one of the primary drivers of global economic recovery.

Warning signals

The worst is not always certain. However, already, the global economic scoreboard is giving warning signals. Overall, growth has become “less homogeneous.” Among the advanced countries first, between on one side the United States and, opposite, all the others. The powerful fiscal stimulus provided by Donald Trump’s administration is driving an already very robust US economy (+2.9% in 2018). The acceleration in activity should enable the unemployment rate to fall to levels not seen for 50 years. At the risk of rekindling inflationary pressures. Moreover, warns the IMF, to increase “global imbalances,” since the United States will import more fuel and increase its trade deficit…

In contrast, the euro area’s growth forecasts are slightly lower: it is expected to grow by 2.2% in 2018, whereas the IMF predicted 2.4% in April. Meanwhile, activity has faltered slightly in Germany and especially in France, whose forecasts are revised (+1.8% in 2018 and +1.7% in 2019, instead of 2.1% and 2% previously forecast). Europe is also suffering from uncertainty in Italy, where political turbulence is likely to affect activity.

Emerging and developing countries have also faced stiff headwinds in recent months. The rise in oil prices had, logically, favored exporters but weighed on others. The appreciation of the dollar (+5% in recent weeks) and the rise in US interest rates have caused the currencies of several major emerging markets to unscrew. The countries with the most unbalanced external accounts were the most shaken. Among them, Argentina, Brazil or India for which the IMF has revised its growth forecasts downwards.

Risk of inflationary pressures in the United States

Currently, financial conditions remain favorable. However, the situation could become more complicated, warns the Fund. There is no shortage of disruptive factors, between the risk of inflationary pressures in the United States, the escalation of trade tensions and the threat of geopolitical shocks. A correction in the markets would put the most indebted economies to the test.

What about the future? While renewing its traditional exhortation to accelerate structural reforms, the IMF launches targeted recommendations. In the United States, asked to press the brake on fiscal stimulus. Germany, too, should use its massive trade surpluses to support growth and reduce global imbalances. The lesson is not new. So is the call to save international cooperation.

To preserve global innovation, productivity and improved living conditions, “countries should work together… to resolve their disagreements without increasing tariff and non-tariff barriers,” the IMF advocates. This advice has been repeated over and over since the election of Donald Trump, to the point of giving the impression that the institution is preaching more and more in the desert…