IMF warns of protectionist threat to global growth

WASHINGTON (AFP) – The IMF on Tuesday left its global economic forecasts unchanged into 2017 but called on governments to take action against the threats of low growth and protectionism.

With Britain voting to secede from the European Union and US presidential candidates disfavoring open borders, the International Monetary Fund said populist politics imperiled free trade and economic growth.

Global output is expected to grow this year by 3.1 percent before rising to 3.4 percent next year, estimates that are unchanged from July, according to the IMF s new World Economic Outlook report.

But the Fund downgraded forecasts both for growth in global trade volume and for advanced economies output, saying that prospects for richer countries had darkened this year.

The IMF notably cut its outlook for the United States, the world s largest economy, but upgraded those for Japan and the eurozone.

It also called Chinese businesses dependence on high levels of credit to bolster growth “dangerous” and unsustainable, creating risks to China s economic stability in the medium-term.

The focus of worries, however, was the sharp rise of talk against free trade pacts and for raising barriers to foreign competition in leading economic powers, including the United States and some European countries.

“It is vitally important to defend the prospects for increasing trade integration,” said IMF chief economist Maurice Obstfeld

“Turning back the clock on trade can only deepen and prolong the world economy s current doldrums.”

“Taken as a whole, the world economy has moved sideways,” Obstfeld said in remarks accompanying the new forecast.

He said that “sub-par growth” was stirring negative economic and political forces around the world.

The IMF downgraded its outlook for advanced economies this year by 0.2 percentage points to 1.6 percent but raised it slightly for emerging and developing economies to 4.2 percent. Next year s forecasts were unchanged.

The world trade outlook also soured, with growth now pegged at a very low 2.3 percent this year, before rising to 3.8 percent in 2017.

“Over the medium term, while we expect that advanced economies will continue along a disappointingly low growth path, emerging market and developing economies should accelerate,” said Obstfeld.

The IMF said global growth still faces notable uncertainties, such as further economic shocks in China, a continued fall in commodity prices and the sudden imposition of new trade barriers.

“Geopolitical tensions could flare up, adding to the humanitarian crises already afoot in the Middle East and Africa,” the report said.

Following a lackluster second quarter, the United States suffered the report s sharpest downward revision of 0.6 percentage points, with growth now foreseen at 1.6 percent this year and 1.8 percent in 2017.

With a strong dollar dragging on exports, weak business investment and three straight quarters of declining productivity have held growth down despite strong jobs markets and consumer spending.

Japan was a surprise bright spot, however, with forecasts revised upward. The Japanese economy is now due to grow by 0.5 and 0.6 percent this year and next.

Likewise, the eurozone got a slight boost, with output expected to increase by 1.7 percent this year — stronger than the United States — and 1.5 percent in 2017.

But Obstfeld warned of the “gathering political fallout” of a low-growth era in wealthy countries where income distribution has skewed “sharply towards the highest earners.”

“The result in some richer countries has been a political movement that blames globalization for all woes and seeks somehow to wall off the economy from global trends rather than engage cooperatively with foreign nations,” he said.

“Brexit is only one example of this tendency.”

Contractions in Russia and Brazil are also due to end, while prospects for China were unchanged, with the world s second largest economy expected to grow a robust 6.6 percent this year and 6.2 percent next year.

But the IMF report chided the alarming growth in private sector credit in China, propping up state enterprises to postpone the recording of losses — risking an “eventual disruptive adjustment.”

“We view the near-term prospects in China as favorable for maintaining our baseline forecast,” Obstfeld told reporters in announcing the new outlook. “Perhaps paradoxically, this confidence about the near-term makes us more worried about the medium term.”