The World Economy: Synchronized Slowdown, Precarious Outlook

IMF Blog, October 15, 2019

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We are downgrading growth for 2019 to 3 percent, its slowest pace since the global financial crisis.
In the October World Economic Outlook, we project global growth to improve to 3.4 percent in 2020, a downward revision of 0.2 percent from April projections.
We estimate that the US-China trade tensions will cumulatively reduce the level of global GDP by 0.8 percent by 2020.
In the absence of monetary stimulus, global growth would be lower by 0.5 percentage points in both 2019 and 2020.

Advanced economies:
- Growth downgraded to 1.7 percent for 2019 (compared to 2.3 percent in 2018).
- Projected to stay at 1.7 percent in 2020.
Emerging market and developing economies:
- Growth revised down to 3.9 percent for 2019 (compared to 4.5 percent in 2018).
- Projected rebound to 4.6 percent in 2020.
- About half of the 2020 rebound is driven by recoveries or shallower recessions in stressed emerging markets such as Argentina, Iran, and Turkey.
- The remainder of the rebound is driven by recoveries in countries where growth slowed significantly in 2019 relative to 2018, such as Brazil, India, Mexico, Russia, and Saudi Arabia.

Rising trade barriers and increasing geopolitical tensions are weakening growth.
Country-specific factors are weighing on several emerging market economies.
Structural forces: low productivity growth and aging demographics in advanced economies.
Sharp deterioration in manufacturing activity and global trade, with higher tariffs and prolonged trade policy uncertainty damaging investment and demand for capital goods.
Trade volume growth in the first half of 2019 has fallen to 1 percent, the weakest level since 2012.
The automobile industry is contracting owing to factors including disruptions from new emission standards in the euro area and China that have had durable effects.

Manufacturing and trade: extremely weak across many economies, driving the slowdown.
Services sector: continues to hold up almost across the globe, keeping labor markets buoyant and supporting wage growth and consumption spending in advanced economies.
Early signs of softening in the services sector in the United States and euro area.

Major central banks have appropriately eased policy in the absence of inflationary pressures and in the face of weakening activity to reduce downside risks and prevent de-anchoring of inflation expectations.
Monetary policy support has materially bolstered growth; without it global growth would be 0.5 percentage points lower in both 2019 and 2020.
Recommendation: deploy effective macroprudential regulation today to prevent mispricing of risk and excessive buildup of financial vulnerabilities.

Escalating trade and geopolitical tensions, including Brexit-related risks, could further disrupt economic activity and derail fragile recoveries, particularly in emerging market economies and the euro area.
Potential consequences of intensified risks: abrupt shifts in risk sentiment, financial disruptions, and reversal in capital flows to emerging market economies.
In advanced economies, low inflation could become entrenched and constrain monetary policy space further into the future.

Undo trade barriers with durable agreements, rein in geopolitical tensions, and reduce domestic policy uncertainty to boost confidence, investment, manufacturing, and trade.
Support steps to de-escalate tensions and roll back recent trade measures, particularly if they can provide a path towards a comprehensive and lasting deal.
Economic policy should support activity in a more balanced manner:
- Monetary policy should be coupled with fiscal support where fiscal space is available and policy is not already too expansionary.
- Countries like Germany and the Netherlands should take advantage of low borrowing rates to invest in social and infrastructure capital.
- If growth deteriorates more severely, an internationally coordinated fiscal response, tailored to country circumstances, may be required.
Undertake structural reforms to boost productivity, improve resilience, and lower inequality.
Reforms in emerging market and developing economies are more effective when good governance is already in place.
Preserve and improve the global trading system; multilateralism is essential to tackle major issues such as risks from climate change, cybersecurity risks, tax avoidance and tax evasion, and the opportunities and challenges of emerging financial technologies.

IMF blog post by Gita Gopinath, October 15, 2019