Sluggish Global Growth Calls for Supportive Policies

IMF Blog, July 23, 2019

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World Economic Outlook July update revises global growth to 3.2 percent in 2019 and 3.5 percent in 2020.
Revision size: a modest downward revision of 0.1 percentage points for both years relative to April projections, building on previous larger downward revisions.
Growth is projected to improve between 2019 and 2020, but "close to 70 percent" of the increase relies on improved performance in stressed emerging market and developing economies and is therefore subject to high uncertainty.

Prolonged policy uncertainty is weighing on global dynamism: heightened trade tensions (despite a recent US-China truce), technology tensions threatening global technology supply chains, and increased prospects of a no-deal Brexit.
Diverging sectoral trends:
- Manufacturing weakness: purchasing manager indices continue to decline, business sentiment worsens, and businesses delay investment due to high uncertainty.
- Global trade weakness: global trade growth slowed to 0.5 percent (year-on-year) in Q1 2019, the slowest pace since 2012.
- Services and consumption: services sector is holding up; consumer sentiment is strong as unemployment rates touch record lows and wage incomes rise in several countries.

Advanced economies (United States, Japan, the United Kingdom, and the euro area):
- Grew faster than expected in Q1 2019, with some factors (e.g., stronger inventory build-ups) judged transitory.
- Projection for advanced economies raised by 0.1 percentage points to 1.9 percent for 2019.
- Growth projected to slow to 1.7 percent going forward due to tapering fiscal stimulus in the United States, weak productivity growth, and aging demographics.
Emerging market and developing economies:
- Growth revised down by 0.3 percentage points in 2019 to 4.1 percent and by 0.1 percentage points for 2020 to 4.7 percent.
- Downward revisions in 2019 are widespread across major economies for varied reasons:
- China: slight downward revision partly reflecting higher US tariffs imposed in May.
- India and Brazil: more significant revisions reflecting weaker-than-expected domestic demand.
- Commodity exporters: supply disruptions (e.g., Russia and Chile) and sanctions on Iran led to downward revisions despite a near-term strengthening in oil prices.
- The projected recovery in 2020 relies on improved growth in stressed economies such as Argentina, Turkey, Iran, and Venezuela, making the outlook highly uncertain.

Financial conditions in the United States and the euro area have eased as the US Federal Reserve and the European Central Bank adopted more accommodative monetary stances.
Emerging market and developing economies:
- Benefited from monetary easing in major economies but faced volatile risk sentiment tied to trade tensions.
- Overall financial conditions for this group are about the same as in April.
- Low-income developing countries: shift from mainly stable foreign direct investment flows to significant volatile portfolio flows as investors search for yield.

Major downside risks:
- Escalation of trade and technology tensions that could significantly disrupt global supply chains.
- A surprise and durable worsening of financial sentiment exposing vulnerabilities built up during years of low interest rates.
- Disinflationary pressures causing difficulties in debt servicing for borrowers.
- Other risks: a surprise slowdown in China, lack of recovery in the euro area, a no-deal Brexit, and escalation of geopolitical tensions.
Quantified scenario: the combined effect of tariffs imposed last year and potential tariffs envisaged in May between the United States and China could reduce the level of global GDP in 2020 by 0.5 percent.

Trade and multilateralism:
- Essential that tariffs are not used to target bilateral trade balances or as a general-purpose tool to tackle international disagreements.
- Strengthen and modernize the rules-based multilateral trading system to encompass areas such as digital services, subsidies, and technology transfer.
Monetary and macroprudential policy:
- Monetary policy should remain accommodative especially where inflation is softening below target.
- Deploy macroprudential tools to ensure financial risks do not build up amid persistently low interest rates.
Fiscal policy:
- Balance growth, equity, and sustainability concerns, including protecting society’s most vulnerable.
- Countries with fiscal space should invest in physical and social infrastructure to raise potential growth.
- In the event of a severe downturn, consider a synchronized move toward more accommodative fiscal policies to complement monetary easing, subject to country-specific circumstances.
Global cooperation:
- Urgent need for greater global cooperation to resolve trade and technology tensions and to address major issues such as climate change, international taxation, corruption, cybersecurity, and the opportunities and challenges of newly emerging digital payment technologies.

Source: Sluggish Global Growth Calls for Supportive Policies (IMF blog, July 23, 2019).