· IMF cuts 2019 growth outlook again, says risks are ‘skewed to the downside’
The International Monetary Fund again reduced its global economic growth forecast for 2019 on Tuesday, citing risks like increasing trade tensions and tighter monetary policy by the Federal Reserve.
The fund said it expects the world economy to grow by 3.3% this year. That’s down from its previous outlook of 3.5%, which was also a downgrade. The IMF added that it expects the economy to expand by 3.6% in 2020, however.
The IMF’s report comes as Congress struggles to pass the United States-Mexico-Canada Agreement (USMCA), a trade deal signed by President Donald Trump and his Mexican and Canadian counterparts at the time, which would replace the existing North Atlantic Free Trade Agreement (NAFTA). Meanwhile, the Trump administration is trying to hammer out another trade deal with China.
· “The balance of risks remains skewed to the downside,” the IMF said. “Failure to resolve differences and a resulting increase in tariff barriers above and beyond what is incorporated into the forecast would lead to higher costs of imported intermediate and capital goods and higher final goods prices for consumers.”
· “Higher trade policy uncertainty and concerns of escalation and retaliation would reduce business investment, disrupt supply chains, and slow productivity growth,” according to the IMF. “The resulting depressed outlook for corporate profitability could dent financial market sentiment and further dampen growth.”
But failure to strike a deal would hurt the U.S. economically and would also derail China’s efforts to reinvigorate its economy, the IMF warns. China’s economy expanded by 6.6% in 2018, which was its slowest pace in nearly 30 years.
Another risk to global economic growth, according to the fund, is a change in monetary policy by central banks, especially the Federal Reserve.
The Fed reversed its stance on policy earlier this year, eliminating all expectations for even a single rate hike for 2019. This follows four rate increases by the U.S. central bank in 2018. The Fed’s reversal contributed to the market’s hot start to 2019, with the S&P 500 notching its biggest first-quarter gain since 1998.
Other risks highlighted by the IMF include a no-deal Brexit, political uncertainty as several countries around the world hold elections and geopolitical tensions in East Asia.
· The yen rose on Tuesday as traders favored the safe-haven currency after the United States announced it was considering tariffs on $11 billion of European goods and the International Monetary Fund downgraded its outlook on the global economy.
These factors weighed on market sentiment, spurring selling on Wall Street and touching off a partial reversal of earlier gains in oil prices. The pull back in crude and other commodity prices cut into the initial gains of the Canadian and Australian dollar as well as emerging currencies.
At 3:20 p.m., the yen was 0.31% higher at 111.12 per dollar and up 0.22% per euro.
· Oil fell from a five-month highs on Tuesday as Russian comments signaling the possible easing of a supply-cutting deal with OPEC countered concern that violence in Libya could further tighten global markets.
A U.S. threat to slap tariffs on hundreds of European goods and a downgrade by the International Monetary Fund in its global economic growth forecasts took the steam out of the rally in global equities and also added to concerns that a slowdown this year will hit fuel consumption and prevent crude prices from rising even higher.
U.S. West Texas Intermediate crude settled 42 cents lower at $63.98, after hitting a high going back to November 2018 at $64.79.
Brent, the global benchmark, fell 49 cents to $70.61 on Tuesday, after earlier rising to $71.34 a barrel, also the highest since November.
Reference: CNBC, Reuters
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