IMF warns EU-US tensions could impact global growth

Some “tentative signs of stabilisation” are appearing in the global economy, despite the fact that the EU-US trade dispute represents a risk to global output, the IMF warned on Tuesday (20 January).

The International Monetary Fund’s managing director Kristalina Georgieva presented the updated economic outlook in Davos (Switzerland), before the World Economic Forum officially starts on Tuesday.

Georgieva pointed out that, after the synchronised economic slowdown registered in 2019, there are “some tentative signs of stabilisation”, thanks to the bottoming up of trade and industrial output. 

But she added that the global economy hasn’t reached “the turning point” yet, and global growth remains “sluggish”.

The Fund revised downwards its GDP forecast to 3.3% and to 3.4% in 2020 and 2021, compared with October projections. 

For the eurozone, the Fund slightly cut by 0.1% to 1.3% its GDP forecast for this year, while it maintained the 1.4% for next year projected in October. 

Its chief economist, Gita Gopinath, explained that the cut was largely due to the substantial revision of the Indian GDP.

Among the persistent risks, Gopinath highlighted the new trade tensions that could emerge between the EU and the US.

“Such events, alongside rising geopolitical risks and intensifying social unrest, could reverse easily financial conditions, expose financial vulnerabilities and severely disrupt growth,” Gopinath added.

She said that it was “very hard” to speculate about whether the imposition of new tariffs by Washington, in particular on car imports, would push the eurozone into recession. 

But “it is important to flag that the growth in the euro area is at the low end, so shocks of this kind can certainly have serious negative consequences”.

This slightly positive view on the global economy was due primarily to the first step taken by the US and China to reduce its trade dispute.

Gopinath explained that if the truce achieved in this ‘phase 1’ becomes “durable”, the accumulative negative impact on the global economy of the US-China dispute between 2018 and the end of 2020 could fall from 0.8% to 0.5% of GDP.

Ready to act

Still, given the sluggish growth, Georgieva told the governments to “be ready to act if growth slows again”.

The Fund insisted on its call to governments with fiscal space to boost investment, especially Germany and The Netherlands in Europe, especially on human capital and ‘green’ priorities.

In order to have a “timely fiscal response”, countries should prepare “contingency measures in advance”, the IMF recommended.

Against this backdrop, Gopinath pointed out that there should be some countercyclical rules that would make the fiscal stimulus “more automatic” than the previous time after the 2008 financial crisis.

Although the risks are “less salient”, the monetary engine responsible for a large part of the recovery is nearing its limits.

According to the Fund’s estimate, monetary easing added 0.5% to the global growth via 71 rate cuts by 49 central banks. Without that intervention, Georgieva said that there would have been a technical recession.

Besides boosting economic growth, central banks are also increasingly becoming important players in the fight against climate change.

Gopinath agreed that central banks can play “an important role” on the green agenda.

New fiscal regime

The Fund also called for a “new taxation regime” to properly tax new models of the economy, fight against tax erosion and tax evasion, and ensuring that everybody pays their fair share to the public coffers.

In this regard, Gopinath said that it is important that the new tax regimes are multilaterally designed and enforced, including advanced and developing economies. 

“Any such reform will have implications not just for the advanced economies’ tax revenues but also for the developing economies’ tax revenues”.

Source: Euractiv.com

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