By Greg Robb, MarketWatch
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The International Monetary Fund is growing even more pessimistic about the global economy, as higher import tariffs are strangling manufacturing activity and international trade.
Global economic growth is expected to fall to 3% rate this year, the slowest pace since the 2008 financial crisis and down from a 3.8% pace seen in 2017.
If global growth slows below a 2.5% rate, that would mean a recession.
“At 3% growth, there is no room for policy mistakes and an urgent need for policymakers to cooperatively de-escalate trade and geopolitical tensions,” said Gita Gopinath, the IMF’s chief economist, at a press briefing
The IMF’s latest World Economic Outlook shaved global growth this year by 0.2 percentage points and 0.1 percentage point next year, compared with the organization’s view from July.
The IMF’s pessimism didn’t deter a rally in risk assets, with the Dow industrials (DOW:DJIA) surging on Tuesday.
Growth was projected to be slower in 2019 in almost every major country except Brazil.
World trade volume growth in the first half of 2019 was 1%, the weakest level since 2012.
If all possible U.S. and China’s trade tariffs are put in place, it will reduce global growth by 0.8% by 2020, the IMF said.
The pessimism was stark for China with output forecast down by 0.3 percentage points this year and 0.2 percentage points next year to a 5.8% growth rate.
China has been hit by higher U.S. import tariffs but also slowing domestic demand following needed measures to rein in debt, the IMF said.
The misery is spreading through Asia, with downward revisions for growth for Hong Kong, South Korea, and Singapore.
Projected growth in Saudi Arabia was cut by 1.7 percentage points this year and output growth in India was cut by 0.9 percentage points.
For 2020, global growth is projected to improve modestly to 3.4% rate, but this optimism looks “precarious,” Gopinath said.
The upturn in 2020 is based on projected improvement in a number of stressed emerging market economies like Turkey, Iran and Argentina.
“With uncertainty about prospects for several of these countries, a projected slowdown in China and the U.S. and prominent downside risks, a much more subdued pace of global activity could well materialize,” the IMF said.
Gopinath raised the possibility of the need for emergency action in the form of “an internationally coordinated fiscal response” if economic growth were to deteriorate further.
U.S. stocks were immune to pessimism with both the Dow Jones Industrial Average (DOW:DJIA) and the S&P 500 Index (S&P:SPX) rising closer to record highs on Tuesday.
The yield on the 10-year U.S. Treasury note (XTUP:BX:TMUBMUSD10Y) inched higher to 1.774%.
Germany should boost fiscal spending, the agency said.
“A country like Germany should take advantage of negative borrowing rates to invest in social and infrastructure capital, even from a pure cost-benefit perspective,” the IMF said.
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While manufacturing has suffered globally, the service sector has held up, at least so far, but there is a concern this can’t last.
“The divergence between manufacturing and services has persisted for an atypically long duration, which raises concerns of whether and when weakness in manufacturing may spill over into the services sector,” she said.
The IMF said monetary policy easing by the Federal Reserve and other central banks has helped support growth and reduce downside risks.
Without this monetary stimulus, global growth would be lower by 0.5 percentage points in both 2019 and 2020.
The world economy is projected to grow slightly faster in 2021-24 thanks to growth in emerging market economies.
Yet growth in key economies, the U.S., China, euro area and Japan, the so-called “Gang of Four,” is expected to moderate “into 2020 and beyond.”