The global expansion, now seen at its most sluggish pace in three years, is likely to firm up next year, but central banks and fiscal authorities have limited policy options to drive a rebound, officials said in the joint communique of the International Monetary Fund’s steering committee.
“While we expect to see a pickup (in growth) next year, trade tensions, geopolitical risks, political instability are among the challenges,” Lesetja Kganyago, the committee’s chairman and the South African Reserve Bank’s governor, said at a press conference after the panel adjourned its semi-annual meeting.
“We agreed we need to act promptly to protect the expansion.”
“Fiscal policy for example should remain flexible and growth-friendly, rebuild buffers, and strike the right chord between debt sustainability and supporting demand,” Kganyago said, capping the spring meetings of the IMF and World Bank in Washington.
The sober mood among finance leaders at the meetings this week was a stark contrast to the optimism that characterised the gathering one year ago when officials were heralding a rare period of robust and synchronised growth.
This week’s proceedings kicked off with the IMF cutting its global growth outlook for the third time in six months.
The world economy will likely grow 3.3% this year, the slowest expansion since 2016 and 0.2 percentage points below the global lender’s estimate from January.
Major central banks including the US Federal Reserve have responded to the slowdown by putting policy-tightening efforts on hold. That has eased the pressures that global financial markets felt at the end of 2018, which contributed to the unwanted tightening of financial conditions partly blamed for the economic weakening.
Growth is projected to firm up in 2020, the IMF said, but some officials are worried the expected rebound will be threatened if the weakening in developed economies such as the United States, Japan and Europe worsens.
“Despite the expected improvement in global economic growth, if economic slowdowns in major economies feed into other economies, the prospects for growth might deteriorate, bringing uncertainty across the entire global economy,” Japanese Finance Minister Taro Aso said in his statement to the IMF committee.
There is some cause for optimism. In Europe, many of the global factors weighing on growth appear to be waning, keeping alive expectations for a recovery in the second half of the year, European Central Bank President Mario Draghi said at a separate press conference.
But he also warned that factors that undermine confidence, including the risk of a hard Brexit and a global trade war, continue to “loom large,” putting growth at risk.
Trade disputes, especially the standoff between the United States and China, have been a central talking point at the meetings this week and have been widely cited as a primary driver behind the weakening of the global economy.
“If you model tariffs on a large portion of the goods that are traded, you take the entire volume of goods traded between the US and China in particular, US$500bil, you apply tariffs to that, you are putting at risk 0.8% of global growth,” IMF Managing Director Christine Lagarde said.
Earlier, China took a swipe at US President Donald Trump’s “America First” policies at the centre of the trade dispute between the world’s two largest economies, including tit-for-tat tariffs on hundreds of billions of dollars of goods.
“The protectionism of some countries has harmed mutual trust among countries, limited the scope for multilateral cooperation, and impeded the willingness to achieve it,” Chen Yulu, a vice-governor at the People’s Bank of China, said in a statement to the IMFC.
US Treasury Secretary Steven Mnuchin told reporters on the sidelines of the meetings that a US-China trade agreement would go “way beyond” previous efforts to open China’s markets to US companies and hoped that the two sides were “close to the final round” of negotiations.
Japan, which will kick off its own negotiations with the Trump administration in Washington on Monday aimed at averting automotive tariffs, also bemoaned the current state of trade.
“The prolonging of trade tensions and policy uncertainties pose a serious risk to the global economy by undermining private investment, disrupting global supply chains and weakening productivity growth,” Aso said.