IMF Slashes Global Growth Forecast As Trade War Intensifies

The International Monetary Fund slashed the global growth forecast for this year and next on Tuesday, citing an increase in the likelihood of further negative shocks, such as a full-blown trade war.

In its latest World Economic Outlook, released in Bali, Indonesia, the Washington-based lender forecast 3.7 percent growth for the world economy for this year and next. That is less than the 3.9 percent predicted in the April report and in a July update.

"Downside risks to global growth have risen in the past six months and the potential for upside surprises has receded," the global lender said in the report. "Escalating trade tensions and the potential shift away from a multilateral, rules-based trading system are key threats to the global outlook," the report noted.

The IMF cautioned that an intensification of trade tensions, and the associated rise in policy uncertainty, could dent business and financial market sentiment, trigger financial market volatility, and slow investment and trade. Further, the lender said higher trade barriers would disrupt global supply chains and slow the spread of new technologies. Consequently, global productivity and welfare would be lowered. And poor households would be hurt disproportionately as more import restrictions would also make tradable consumer goods less affordable.

"There are clouds on the horizon," IMF Chief Economist Maurice Obstfeld said during a press conference.

"Growth has proven to be less balanced than we had hoped."

Obstfeld noted that growth is being supported in several key economies by policies that seem unsustainable over the longer term.

"These concerns raise the urgency for policymakers to act," the economist added.

The US growth forecast for this year was retained at 2.4 percent, while the projection for next year was trimmed to 2.1 percent from 2.2 percent seen in July, citing the recently enacted trade tariffs. Growth projections for China for this year was left unchanged at 6.6 percent for this year, but the forecast for next year was cut to 6.2 percent from 6.4 percent. Eurozone's growth outlook for this year was cut to 2 percent from 2.2 percent, while the projection for next year was kept at 1.9 percent. The UK growth forecasts for this year and next were unchanged at 1.4 percent and 1.5 percent, respectively. Obstfeld expressed hope that a deal that includes tariff-free trade between the EU and the UK would be reached. India's growth projection for this year was kept at 7.3 percent, while the outlook for next year was trimmed to 7.4 percent from 7.5 percent.