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The global economy is at risk of bumping into a painful deeper economic slowdown as the U.S.-China trade fight dragged the world's growth engine, trade, to a near halt, pushing the IMF to cut forecast for 2019 and 2020 growth to its weakest since the 2008 recession.
Trade, which is an engine of growth that increases economic activity and creates jobs, shrank from 5 percent at the start of 2018 to a contraction in the second quarter of this year, hurting investment and growth worldwide.
"World growth has slowed significantly since the start of 2018. The risk of a further slippage in world growth, toward or into recession territory, is significant," said Ben May, Director of global macro research at Oxford Economics in a note.
"We expect the uncertainty created by China-U.S. trade tensions and other geopolitical factors to linger and keep investment growth subdued. We are seeing growing signs of spill-overs to firms' hiring decisions which may prompt belt-tightening by consumers."
The IMF downgraded its global growth forecast for 2019 to 3.0 percent from a forecast of 3.2 percent in July. It was the weakest 2009. The downgrade reflected a “sharp deterioration in manufacturing activity and global trade” and the downward impact of trade tensions on investment. Forecasts for 2020 were also downgraded from 3.5 percent to 3.4 percent, OCBC added.
The Fund said global growth remains subdued. Since the April, the United States further increased tariffs on certain Chinese imports and China retaliated by raising tariffs on a subset of US imports. Additional escalation was averted following the June G20 summit.
Global technology supply chains were threatened by the prospect of US sanctions, Brexit-related uncertainty continued, and rising geopolitical tensions roiled energy prices.
Meanwhile, risks to the forecast remain mainly skewed to the downside. They include further trade and technology tensions that dent sentiment and slow investment; a protracted increase in risk aversion that exposes the financial vulnerabilities continuing to accumulate after years of low interest rates; and mounting disinflationary pressures that increase debt service difficulties, constrain monetary policy space to counter downturns, and make adverse shocks more persistent than normal.
