Trump’s trade war with China and Europe will hit global growth-IMF

Donald Trump’s trade war with China and Europe is forecast to hit global growth this year and reverberate through 2019, the International Monetary Fund has warned in its latest health check on the global economy.

The escalation of the US president’s protectionist policies, which has resulted in the world’s largest economy doubling import duties on some Chinese goods, has dragged down the forecast for growth this year and next, with the world’s largest trading countries, including the US, France, Germany and China, among the hardest hit.

Britain is also expected to suffer slower growth against a backdrop of trade conflicts, though Brexit uncertainty continues to inflict the most harm to the UK’s outlook for expansion this year and next, IMF officials said.

The IMF said that even without a further deterioration in US and China relations, the global economy would grow this year at 3.7% and at the same rate in 2019 compared with the 3.9% it predicted for both years in an interim report in April.

The Washington-based lender’s economists are usually reluctant to name and shame individual countries, but it is clear that attacks by the Trump administration on the postwar consensus of open trade and cooperation over issues such as climate change has prompted more direct references to the US than previously seen.

In its world economic outlook, which is published twice a year, with the latest issued before the fund’s annual meeting in Bali this week, officials warned that the lingering threat of higher trade barriers meant there was a greater likelihood it would downgrade its growth forecasts during its next review.

Officials at the fund said much of the decline in global growth was also the result of many developing countries being hit hard by a depreciation in their currencies, which had increased the cost of imports and especially oil.

Last month, the US president slapped extra duties on $200bn (£153bn) of Chinese goods and China retaliated with extra duties on $60bn of US goods. This followed an earlier increase in US duties on the import of steel, aluminium and cars.

Trump’s $1.1tn of tax cuts was expected to maintain US GDP growth at 2.9% this year, but the deterioration in trade and the waning impact next year of one-off government subsidies is likely to see growth fall to 2.5%, the IMF said.

Germany was expected to grow this year and next at an annual rate above 2% but IMF officials judged that the impact of trade tariffs would mean Berlin should expect to reach no more than 1.9% in each of the next two years. France was the other major eurozone country predicted to suffer falls in growth in 2018-19.

The UK’s outlook for next year remains at 1.5% but the previous forecast for a 1.3% growth rate this year was cut to 1.1% after Brexit uncertainty weighed more heavily on trade and investment.

The IMF said: “Escalating trade tensions and the potential shift away from a multilateral, rules-based trading system are key threats to the global outlook. Since the April 2018 forecast, protectionist rhetoric has increasingly turned into action, with the United States imposing tariffs on a variety of imports, including on $200 billion of imports from China, and trading partners undertaking or promising retaliatory and other protective measures.

“An intensification of trade tensions, and the associated rise in policy uncertainty, could dent business and financial market sentiment, trigger financial market volatility, and slow investment and trade.”

In a further swipe at Trump, the IMF said countries needed to work together to tackle challenges that extended beyond their own borders. Not only were nationalist trade policies harming growth but “cooperative efforts are also essential for completing the financial regulatory reform agenda, strengthening international taxation, enhancing cybersecurity, tackling corruption, and mitigating and coping with climate change”, it said.

In a blog before the report’s publication, the IMF’s outgoing chief economist, Maurice Obstfeld, urged governments to reject calls to bolster growth with debt-fuelled spending. He cautioned that extra borrowing would make finance ministries more vulnerable to negative shocks, which had become more likely in the past year.

He said: “The likelihood of further negative shocks to our growth forecast has risen. In several key economies, moreover, growth is being supported by policies that seem unsustainable over the long term.”

The report echoed his view, adding: “Fiscal policy should aim to rebuild buffers for the next downturn. In countries at or close to full employment, with an excess current account deficit and an unsustainable fiscal position (notably the United States), public debt needs to be stabilised and eventually reduced.”

Obstfeld’s warning echoes the IMF’s review of the UK’s public finances last month, when it warned the chancellor, Philip Hammond, to pay for a £20bn increase in the health budget with extra taxes or spending cuts in other areas.