The International Monetary Fund downgraded its growth projection for 2019 amidst a Sino-American trade war and the increasing likelihood of a no-deal Brexit.
The Washington-based institution now projects 3,2% global growth rather than 3,3% projected in April and 3,6% projected in January. The downgrade is mostly justified by declining investment, as business confidence is collapsing and the market is risk-averse. Consumer confidence is also affected.
In May 2019 China and the US were embroiled in a spiralling trade was of escalating tariffs. Some US companies are moving their supply chains out of China to avoid tariffs. Global trade volumes are said to have declined by 0,5% since the first quarter of 2019.
The IMF model still presumes an orderly UK exit, which means the risk to global growth is on the downside. The UK’s projected growth stands at 1,3% for 2019, which is marginally better than the 1,2% earlier this year.
However, if the UK leaves without a transition arrangement, the economy could suffer a serious shock. For 2020, the IMF projects 1,4% growth, provided there is no disorderly Brexit. As for the US economy, the trade war is expected to cost dearly: from 2,9% growth projected in 2019, growth will drop to 1,9% in 2020.
Another downside shock for the European economy – particularly Germany – would be the introduction of tariffs on European cars imported to the US.
Responding to the economic slowdown, the US Federal Reserve is expected to cut interest rates by at least 25 basis points at the end of July. According to Der Spiegel, the European Central Bank is preparing for the second wave of quantitative easing by November. Both the ECB and the Bank of Japan already have their interest rates at zero.
On Tuesday, American trade negotiators told CNBC that U.S. officials are planning to travel to China sometime between Friday and Thursday, August 1, but a deal is nowhere in sight. The US is willing to discuss easing restrictions on China’s Huawei in exchange for the purchase of U.S. agricultural produce but this will not pave the way to an end to the ongoing trade war.