IMF warns global outlook ‘precarious’
Growth forecasts for Iran, Saudi Arabia sharply cut
WASHINGTON: The world economy is slowing to its weakest pace since the global financial crisis, as the US-China trade war undercuts business confidence and investment, the IMF said yesterday. It warned that the outlook is beset by risks, and urged policymakers to work to find resolutions to trade disputes, since there are limited tools to respond to a new crisis.
“With a synchronized slowdown and uncertain recovery, the global outlook remains precarious,” International Monetary Fund chief economist Gita Gopinath said in her introduction to the latest forecasts. The IMF for the past year has every three months cut projected growth for 2019 as trade conflicts worsened.
In its latest World Economic Outlook it trimmed the estimate by another two-tenths, to 3.0 percent. The report also lowered the 2020 forecast by a tenth to 3.4 percent. “At three percent growth, there is no room for policy mistakes and an urgent need for policymakers to cooperatively deescalate trade and geopolitical tensions,” Gopinath said.
In addition, the trade conflicts and a slowdown in auto sales worldwide means trade growth has slowed sharply, falling in the first half of the year to its weakest since 2012, with an estimated increase of just 1.1 percent this year after a 3.6 percent jump in 2018.
Gloomy regional outlook
The IMF sharply downgraded growth projections for Saudi Arabia and Iran, the two largest Mideast economies, citing the impact of US sanctions, geopolitical tensions and low oil prices. In its World Economic Outlook, the global lender cut forecasts for almost all countries in the Middle East and North Africa (MENA) as the region is buffeted by biting sanctions on Iran and nail-biting anxiety over last month’s attacks on Saudi oil facilities. The IMF said Iran’s economy will contract by a massive 9.5 percent this year, its worst performance since 1984 when the Islamic republic was at war with neighboring Iraq.
The figure is 3.5 percentage points lower than the IMF’s April projections, reflecting a rapid deterioration in Tehran’s economy after the US implemented tighter sanctions on its oil exports, the nation’s main source of income. This is the second year in a row that Iran’s economy is mired in recession, after it shrank by 4.8 percent in 2018.
Iran has “been or continues to be experiencing very severe macroeconomic distress,” the IMF said, adding that growth in 2020 will be flat. The forecast for Saudi Arabia, the region’s largest economy, was also cut to just 0.2 percent for 2019, a substantial 1.6 percentage points lower than April’s projections. The outlook is the worst since 2017 when the kingdom’s economy contracted by 0.7 percent. But the IMF raised its Saudi growth forecast for next year to 2.2 percent, slightly above April’s projections, on expectations that the non-oil sectors will strengthen following subsidy reforms.
The oil giant has substantially cut power and fuel subsidies as well as imposed fees on expatriate visas and a five-percent value added tax as part of a reform program to decrease its dependence on oil. Fitch Ratings in September downgraded Saudi Arabia’s credit rating by one notch following the devastating attacks on key oil facilities that knocked out half its production-a strike that has been blamed on Iran.
Growth projections for the United Arab Emirates, the most diversified economy in the region, was cut sharply to 1.6 percent from 2.8 percent in April, due to weak oil growth in Abu Dhabi and a general slowdown in Dubai. The IMF also cut forecasts for other hydrocarbon exporters Qatar, Kuwait and Oman but raised the outlook for Iraq, the region’s second largest crude exporter, following a 0.6 percent contraction last year.
The IMF also cut its forecast for MENA growth to a meager 0.1 percent this year, 1.2 percentage points lower than April projections, reflecting weakening economies in a region rattled by conflict. The cut to MENA growth is “largely due to the downward forecast revision for Iran and Saudi Arabia,” it said. “Civil strife in some other economies, including Libya, Syria, and Yemen, weigh on the region’s outlook.”
The global lender said that the price of oil and gas, the main source of income for the region, dropped 13 percent between April and October and that oil prices will continue to decline until 2023. It said the September 14 attacks on Saudi oil facilities have stoked tension and uncertainty in the region, especially following tanker attacks in the strategic Strait of Hormuz through which 20 percent of oil trade passes.
Running low on ammo
While the US economy also has been hit by uncertainty-largely created by President Donald Trump’s trade offensive-the world’s largest economy remains a bright spot on the global stage, the report said. After upgrading its US outlook in July, the latest WEO reversed course, and cutting the US forecast this year to 2.4 percent-still above trend, but two-tenths below the July forecast. In 2020, the IMF projects US GDP to expand by 2.1 percent, unchanged from the prior report.
“For the United States, trade related uncertainty has had negative effects on investment, but employment and consumption continue to be robust, buoyed also by policy stimulus,” Gopinath said.
Major central banks have taken steps to soften the blow to growth by lowering interest rates, without which the downturn would have been worse, she said. However, she cautioned that monetary policy “cannot be the only game in town” and governments, notably in countries like Germany, should take advantage of low rates to make investments to support growth.
“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 warned.
“To forestall such an outcome, policies should decisively aim at defusing trade tensions, reinvigorating multilateral cooperation, and providing timely support to economic activity where needed,” the report said. But trade is not the only reason for the global slowdown: the report notes that in China’s economy, for example, growth is moderating as intended amid slowing domestic demand. Other major economies like Brazil, India, Mexico, Russia and South Africa are slowing this year due to “idiosyncratic reasons” but are expected to recover in 2020.