Business

IMF Spots Trouble Ahead for the Global Economy After 2020

The International Monetary Fund predicted the world economy’s strongest upswing since 2011 will continue for the next two years, but warned the seeds of its demise may have already been planted.

The fund on Tuesday left its forecasts for global growth this year and next at the 3.9 percent it estimated in January and raised its outlook for the U.S. as Republican tax cuts take effect.

Solid Growth

The IMF predicts the strong economic upswing will continue for the next two years

Source: International Monetary Fund 

IMF Spots Trouble Ahead for the Global Economy After 2020

Beyond that horizon, it was more pessimistic, projecting global growth will fade as central banks tighten monetary policy, the U.S. fiscal stimulus subsides, and China’s gradual slowdown continues.

“Global growth is projected to soften beyond the next couple of years,” the IMF said in its latest World Economic Outlook report. “Once their output gaps close, most advanced economies are poised to return to potential growth rates well below pre-crisis averages, held back by aging populations and lackluster productivity.”

The IMF warned the expansion could be derailed if countries resort to tit-for-tat trade sanctions.

“The first shots in a potential trade war have now been fired,” IMF Chief Economist Maurice Obstfeld said in a foreword to the fund’s outlook, reiterating the IMF’s warning earlier this month that the global trading order is in danger of being “torn apart.”

“Conflict could intensify if fiscal policies in the United States drive its trade deficit higher without action in Europe and Asia to reduce surpluses,” he said.

In a press conference later Tuesday, Obstfeld called the current trade frictions “more of a phoney war,” referring to the period of limited conflict at the start of the Second World War. “There’s still room for countries to engage in a more multilateral set of discussions to take advantage of the set of dispute resolution mechanisms that are in place to avoid an intensification,” he said, adding that all countries would lose in a trade war.

Investors with $543 billion of assets are the least optimistic about global growth momentum since the U.K. voted to leave the European Union, according to Bank of America Merrill Lynch. Just 5 percent of money managers project the international economy to be stronger in the next 12 months, the lowest level since June 2016, according to the bank’s April survey. Underscoring diminished growth momentum, earnings expectations have peaked.

Good Times

Governments should take advantage of the good times to make structural reforms and put in place tax policies that raise the potential output of their economies, Obstfeld said.