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IMF Warns of Global Economic Storm

Global economic growth continues to under-perform expectations, with the International Monetary Fund (IMF) recently highlighting "four clouds" on the economic horizon. During the last week of January, the IMF cut the global growth forecast to its lowest level since World War II, from 3.7 percent to 3.5 percent. While the Chinese economic slowdown and US-China trade war are the most obvious risks, global financial tightening and rising political uncertainty are also having a big impact on the economic landscape.     

According to IMF managing director Christine Lagarde at the World Government Summit in Dubai, "The bottom-line - we see an economy that is growing more slowly than we had anticipated." Legarde identified four key risks on the horizon, including “trade tensions and tariff escalations, financial tightening, uncertainty related to (the) Brexit outcome and spillover impact and an accelerated slowdown of the Chinese economy.” With all of these issues transcending national borders, the Australian economy will be affected.

Trade tensions between the United States and China have already had a pronounced impact on global growth. Tariffs imposed by the world's two largest economies are unlikely to go away any time soon, with the situation unresolved and difficult to predict. President Trump is set to increase existing tariffs on US$200 billion worth of Chinese goods from 10 percent to 25 percent, with the looming March 1 deadline quickly approaching. According to Lagarde, “We have no idea how it is going to pan out and what we know is that it is already beginning to have an effect on trade, on confidence and on markets.”

Widespread financial tightening is also having a profound effect on the global economy, with rising borrowing costs and unsustainable debt increasingly recognised across government, business, and household sectors. While high levels of international debt are one thing, unsustainable conditions will have a much more pronounced effect if they occur amidst a backdrop of poverty and inequality. According to the International Labour Organisation, unemployment could affect 7.1 percent of the world's labour force by the end of this year.

Global trade is also expected to shrink this year, with the IMF predicting a 3 percent reduction in trade figures after a 4 percent growth last year and 7 percent growth in 2007. While a number of long-term macroeconomic factors have led to this dramatic reduction, uncertainty surrounding the Brexit outcome, populist economic policies, and a weak Chinese economy are also having a big effect. Growth continues to decline as China focuses on its domestic economy, as it makes the long-term transition from export and investment-led growth to consumption-led growth.

According to Nouriel Roubini, professor of economics at New York University, current conditions point towards the perfect storm: "There is nowhere to hide. We have for the first time in decades a global synchronised recession. This is not your traditional minor recession." While the Australian economy managed to cope very well during the GFC, it will face additional pressures due to the housing market downturn and the accelerated slowdown of the Chinese economy. In clear anticipation of the global situation, the Reserve Bank of Australia recently dropped its growth forecast for the Australian economy, from 3.25 percent growth in the 12 months ending June down to 2.5 percent.

 

Image source:  xtock/Shutterstock

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