A Weakening Global Expansion Amid Growing Risks

IMF Blog, January 21, 2019

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Global growth projected at 3.5 percent in 2019 and 3.6 percent in 2020, 0.2 and 0.1 percentage point below last October’s projections.
Global expansion is weakening somewhat faster than expected; risks of larger downward corrections are rising.
Financial markets in advanced economies have become intertwined with trade tensions, tightening financial conditions and escalating risks to global growth.

Forecast for advanced economies: growth slows from 2.3 percent in 2018 to 2 percent in 2019 and 1.7 percent in 2020.
Euro area revisions are the main reason for downward adjustments among advanced economies:
- Germany: production difficulties in the auto sector and lower external demand weigh on 2019 growth.
- Italy: sovereign and financial risks—and the connections between them—are adding headwinds to growth.
United States: expansion continues but expected to decelerate with the unwinding of fiscal stimulus.
Inflation dynamics:
- Core inflation is close to target in the United States where growth is above trend.
- Core inflation remains significantly below target in the euro area and Japan.

Economic activity projected to tick down to 4.5 percent in 2019, with a rebound to 4.9 percent in 2020.
Projection for 2019 lowered by 0.2 percentage point from October, mainly due to:
- A large projected contraction in Turkey amid policy tightening and adjustment to more restrictive external financing conditions.
- A significant downgrade to growth in Mexico in 2019–20, reflecting lower private investment.
Projected rebound in 2020 driven by expected recovery in Argentina and Turkey.
Headwinds include weaker capital flows following higher US policy rates and exchange rate depreciations; some pickup in inflation in emerging economies reversed toward the end of 2018.

Trade and investment have slowed.
Industrial production outside the United States has decelerated.
Purchasing managers’ indices have weakened, flagging softening momentum.
These cyclical forces that propelled broad-based growth since the second half of 2017 may be weakening faster than expected in October.

Escalation of trade tensions and worsening financial conditions:
- Higher trade uncertainty will further dampen investment and disrupt global supply chains.
- A more serious tightening of financial conditions is particularly costly given high levels of private and public sector debt.
China: a faster-than-expected growth slowdown—especially if trade tensions continue—could trigger abrupt sell-offs in financial and commodity markets as in 2015–16.
Europe: ongoing Brexit uncertainty and costly spillovers between sovereign and financial risk in Italy remain threats.
United States: a protracted US federal government shutdown poses downside risks.

Resolve trade disagreements cooperatively and quickly to reduce policy uncertainty rather than raising harmful barriers; implement the call of Group of Twenty leaders to reform the World Trade Organization in Buenos Aires.
Where fiscal space is low, adjust fiscal policy in a growth-friendly manner to ensure public debt is on a sustainable path while protecting the most vulnerable.
Monetary policy in advanced economies should continue to normalize carefully; major central banks should calibrate next steps in line with slowing momentum.
Use macroprudential tools where financial vulnerabilities are building up.
Across all economies, implement measures to boost potential output growth and enhance inclusiveness.
Strengthen multilateral cooperation and ensure multilateral institutions like the IMF have adequate resources, given more limited policy space than in 2008.

Gita Gopinath, January 21, 2019