Time to de-escalate trade tensions

The downgrading by the International Monetary Fund (IMF) of its outlook for the world economy and its prediction that growth this year will be the weakest since the 2008 financial crisis should serve as a loud wake-up call for world leaders to alter course and initiate corrective measures to get things back on track.

After all, each and every individual will be impacted when the global economy faces turbulence.

The IMF’s latest World Economic Outlook does foresee a slight rebound in 2020, but threats ranging from heightened political tensions in the Middle East and the unending tariff war between the United States and China indicate that things are not moving in the right direction.

As per IMF Chief Economist Gita Gopinath, with a synchronised slowdown and uncertain recovery, the global outlook remains precarious.

The weakness in growth is driven by a sharp deterioration in manufacturing activity and global trade, with higher tariffs and prolonged trade policy uncertainty damaging investment and demand for capital goods.

In addition, the automobile industry is contracting owing also to a variety of factors, such as disruptions from new emission standards in the euro area and China that have had durable effects.  Overall, trade volume growth in the first half of 2019 has fallen to 1 per cent, the weakest level since 2012.

Fortunately, in contrast to extremely weak manufacturing and trade, the services sector continues to hold up almost across the globe. This has kept labor markets buoyant and wage growth and consumption spending healthy in advanced economies.

Nevertheless, things cannot be taken for granted, as there are some initial signs of softening in the services sector in the United States and euro area.

It should be noted that advanced economies continue to slow towards their lower long-term potential. Growth has been downgraded to 1.7 per cent for 2019 (compared to 2.3 per cent in 2018) and it is projected to stay at this level in 2020.

Strong labour market conditions and policy stimulus are helping offset the negative impact from weaker external demand for these economies.

According to IMF officials, the uptick in global growth for 2020 is driven by emerging markets and developing economies that are projected to experience a growth rebound to 4.6 per cent.

About half of this rebound is driven by recoveries or shallower recessions in stressed emerging markets, such as Argentina, and the rest by recoveries in countries where growth slowed significantly in 2019 relative to 2018, such as Brazil, India, Mexico and Russia.

There is considerable uncertainty surrounding these recoveries, especially when major economies like the United States, Japan, and China are expected to slow further into 2020.

The IMF for the past year has every three months cut projected growth for 2019 as trade conflicts worsened.

Kristalina Georgieva, who presides over her first IMF meetings after succeeding Christine Lagarde this month as the fund’s managing director, stated last week that the various trade disputes could produce a loss of around $700 billion in output by the end of next year or about 0.8% of world output.

Another worrisome development is that the slowdown this year has occurred even as the Federal Reserve and other central banks have been cutting interest rates and deploying other means to bolster economies.

There is indeed an urgent need for policymakers to cooperatively deescalate trade and geopolitical tensions. There is unquestionably no room for policy mistakes.