IMF cuts global growth forecast, stands pat on Canadian outlook

USMCA deal may have allowed Canada to escape further downgrade: economists

The International Monetary Fund downgraded its outlook for global growth on Tuesday, but its forecast for Canada remained unchanged, in part, economists said, because of the new USMCA trade deal.

According to the IMF, global growth is now expected to plateau at 3.7 per cent in 2018 and 2019, down from the 3.9 per cent estimate the group made in July. Most major markets, including the U.S. and the Euro Area were downgraded, with the report suggesting that the U.S.-China trade war and a slowing of emerging markets such as Brazil and Turkey were to blame for the first downward revision since July 2016.

But the forecast for Canada remained in line with the July IMF report, which suggested that Canada’s growth would dip to 2.1 per cent in 2018 from three per cent in 2017. In 2019, growth is still expected to fall a second time to two per cent.

While Canada’s growth was already expected to slow, the USMCA trade deal agreed to on Sept. 30 may have allowed it to escape a further downgrade by the IMF, BMO senior economist Robert Kavcic suggested.

“There was a real risk that Canada was going to see a growth hit if we did not get a USMCA deal,” Kavcic said. “It didn’t add anything to growth but it took away a risk that growth was going to get dinged down the road.”

Because a trade deal was reached with the U.S. and Mexico, he said focus will now shift to China and its ongoing trade war with the U.S.

The trade war with China poses a significant threat to global growth, the IMF said. If U.S. President Donald Trump carries out threats to impose US$267 billion worth of additional tariffs on China — after already levelling the country with US$200 billion in tariffs on imports — global output could take a hit totalling more than 0.8 per cent in 2020. If Trump continues to escalate the war, the U.S. could see a GDP loss of 0.9 per cent in 2019. China is at risk of an even greater loss of 1.6 per cent in GDP.

A longer-lasting trade war could have an effect on Canada by pushing down commodities prices in general, CIBC Capital Markets chief economist Avery Shenfeld said. “China, for example, is a major buyer of base metals so the prices of some of Canada’s raw metals exports are impacted even if we don’t sell to them directly,” Shenfeld said.

Shenfeld wasn’t surprised to see Canada’s growth rate untouched, he said, because a slowdown had already been projected with the country close to full employment.

The IMF wasn’t alone in pre- dicting a 0.2 percentage point decline in global growth Tuesday. After first predicting that oil prices would reach US$100 per barrel in a report in May, a Bank of America Merrill Lynch note estimated on Tuesday that such a price hike would result in the same decline in global growth, according to Bloomberg News.

While most markets would stand to take a hit from such a hike in oil prices — the note, according to Bloomberg, specifically mentioned Japan, China and India as being most at risk — Canada could again escape unscathed. Surging oil prices are usually a net positive for Canada, Shenfeld said, although less so when the surge is due to the sanctions in Iran and political turmoil in Venezuela instead of strong global activity. CIBC, Shenfeld added, is not forecasting a spike in oil prices.

Kavcic also noted that such a surge would be a net positive for Canada, suggesting that it would drive new investment into the oilsands and boost the loonie. It could also see a “rotation of strength,” Kavcic said, from Ontario, Quebec and B.C. to Saskatchewan and Alberta.

There was a real risk that Canada was going to see a growth hit if we did not get a USMCA deal.