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Cbanks cut

After delaying twice, Japan decided to stick with its decision to raise its sales tax from 8% to 10% this month – a move aimed at improving its weak public finances – even as growth concerns persist. Indeed, the economy slowed more than initial estimates suggested in Q2 after annualized growth was revised down from 1.8% to 1.3%. The economy continues to face headwinds from weaker global growth and the ongoing trade war between the US and China, which have weighed heavily on Japan’s external sector. Exports fell for the ninth consecutive month in August (-8.2% y/y), while imports declined for the fourth straight month (-11.9%) reflecting ongoing softness in the domestic economy.

China cut its required bank reserve ratio by 50 basis points, the third cut this year, in a bid to prop up growth weighed down by trade tensions with the US and a softer global economy. Indeed further stimulus measures are likely going forward. Chinese exports witnessed a surprise decline in August, falling by 1% while imports fell for the fourth straight month, reflecting the ongoing weakness in the domestic economy as well. Meanwhile, PMI manufacturing data for September was mixed. While the official PMI series pointed to a continued contraction in the manufacturing sector, private PMI data pointed to a better-than-expected improvement, which might in part be attributed to progrowth reforms announced by the government over the past couple of months.

September closed with oil prices trading at or below where they were on the eve of the Houthi-claimed missile strike on Saudi Arabia’s oil infrastructure.

The price of Brent spiked in the

immediate aftermath of the Abqaiq/ Khurais attacks by more than 20% to $71.9 in intraday trading – the biggest surge in oil prices since the 1990 invasion of Kuwait. However it ended the month at $60.8, up just 0.6% m/m and remained around the $60 mark in early October.

The 14 September attacks knocked out 5.7 mb/d of Saudi crude output, close to half of the kingdom’s capacity, and 5% of global oil supplies. But the geopolitical risk premium that initially pushed oil prices higher has all but evaporated, partly due to Saudi reassurances of export commitments, ample global stocks and a faster-than-expected recovery in Saudi oil production but also due to the markets’ refocusing on the poor health of the global economy.

It was a mixed bag in terms of economic indicators for the GCC in September. The PMI for Saudi Arabia showed private sector activity continuing to gain traction, improving for the third month in a row to 57.3 on gains in output and new orders. Official data meanwhile showed Saudi non-oil GDP growth of 2.9% y/y in 2Q19 (from 2.1% in 1Q19). By contrast, the UAE PMI continued to ease at 51.1 in September from 51.6 in August, amid weakening domestic demand.

Meanwhile Bahrain’s fiscal deficit narrowed by 38% y/y in 1H19 to 3.4% of GDP, on the back of cost-cutting measures and revenue-boosting reforms, including the addition of VAT, under the Fiscal Balance Program. Earlier in September, central banks in Saudi, the UAE and Qatar followed the US Federal Reserve in cutting their benchmark interest rates by 25 bps. Taking advantage of lower rates, GCC bond issuance proceeded apace in September: Abu Dhabi issued $10 billion and Bahrain sold $2 billion worth of conventional/Islamic bonds.

WASHINGTON, Oct 15, (AP): The International Monetary Fund is further downgrading its outlook for the world economy, predicting that growth this year will be the weakest since the 2008 financial crisis primarily because of widening global conflicts.

The IMF’s latest World Economic Outlook foresees a slight rebound in 2020 but warns of threats ranging from heightened political tensions in the Middle East to the threat that the United States and China will fail to prevent their trade war from escalating.

The updated forecast released Tuesday was prepared for the fall meetings this week of the 189-nation IMF and its sister lending organization, the World Bank. Those meetings and a gathering Friday of finance ministers and central bankers of the world’s 20 biggest economies are expected to be dominated by efforts to de-escalate trade wars.

The new forecast predicts global growth of 3% this year, down 0.2 percentage point from its previous forecast in July and sharply below the 3.6% growth of 2018. For the United States this year, the IMF projects a modest 2.4% gain, down from 2.9% in 2018.

Next year, the fund foresees a rebound for the world economy to 3.4% growth but a further slowdown in the United States to 2.1%, far below the 3% growth the Trump administration projects.

IMF economists cautioned that that even its projected modest gains might not be realized.

“With a synchronized slowdown and uncertain recovery, there is no room for policy mistakes, and an urgent need for policymakers to cooperatively de-escalate trade and geopolitical tensions,” Gita Gopinath, the IMF’s chief economist, said in the report.

Last week, the United States and China reached a temporary cease-fire in their trade fight when President Donald Trump agreed to suspend a tariff hike on $250 billion of Chinese products that was to take effect this week. But with no formal agreement reached and many issues yet to resolved, further talks will be needed to achieve any meaningful breakthrough. The Trump administration’s threat to raise tariffs on an additional $160 billion in Chinese imports on Dec 15 remains in effect.

The IMF’s forecast predicted that about half the increase in growth expected next year will result from recoveries in countries where economies slowed significantly this year, as in Mexico, India, Russia and Saudi Arabia.

This year’s slowdown, the IMF said, was caused largely by trade disputes, which resulted in higher tariffs being imposed on many goods. Growth in trade in the first half of this year slowed to 1%, the weakest annual pace since 2012.

Kristalina Georgieva, who will preside over her first IMF meetings after succeeding Christine Lagarde this month as the fund’s managing director, said last week that the various trade disputes could produce a loss of around $700 billion in output by the end of next year or about 0.8% of world output.

IMF economists said one worrisome development is that the slowdown this year has occurred even as the Federal Reserve and other central banks have been cutting interest rates and deploying other means to bolster economies.

The IMF estimated that global growth would have been about onehalf percentage point lower this year and in 2020 without the central banks’ efforts to ease borrowing rates.

“With central banks having to spend limited ammunition to offset policy mistakes, they may have little left when the economy is in a tougher spot,” Gopinath said.

In addition to trade and geopolitical risks, the IMF envisions threats arising from a potentially disruptive exit by Britain from the European Union on Oct 31. The IMF urged policymakers to intensify their efforts to avoid economically damaging mistakes.

“As policy priorities go, undoing the trade barriers put in place with durable agreements and reining in geopolitical tensions top the list,” Gopinath said. “Such actions can significantly boost confidence, rejuvenate investment, halt the slide in trade and manufacturing and raise world growth.”

The IMF projected that growth in the 19-nation euro area will slow to 1.2% this year, after a 1.9% gain in 2018. It expects the pace to recover only slightly to 1.4% next year.

Growth in Germany, Europe’s biggest economy, is expected to be a modest 0.5% this year before rising to 1.2% next year.

China’s growth is projected to dip to 6.1% this year and 5.8% next year. These would be the slowest rates since 1990, when China was hit by sanctions after the brutal crackdown on prodemocracy demonstrators in Beijing’s Tiananmen Square.