IMF again cuts global economic growth forecast

The IMF is again scaling back projections for global economic growth in the near term - a forecast with implications on demand for oil and other commodities.

The latest update to the organization's World Economic Outlook, released today, projects a growth rate for the global economy of 3.5pc/yr for 2019, a drop of 0.2 percentage points from its previous forecast in October. That compares with a 3.7pc growth rate in 2018. IMF forecasts are widely used in the modeling behind key oil demand projections, including those of the IEA.

The IMF in October already scaled back 2019 growth outlook to account for the effect of protectionist measures implemented by Washington and its major trading partners. Another downward revision reflects weakening financial market indicators and carry over from slower-than-expected growth in major European and emerging market economies last year.

US growth is expected to decelerate as the effects of corporate tax cuts enacted in late 2017 wear off. The IMF left its US forecast unchanged at 2.5pc for this year, down from 2.9pc in 2018. The IMF forecast has not yet incorporated the effects of a partial shutdown in US government agencies that began on 22 December. US government and private economists expect the ongoing shutdown to shave up to 0.5 percentage points off the first quarter growth rate this year.

The immediate effect of the shutdown has been to add volatility to equity, oil and financial markets. Some financial indicators globally, such as purchasing managers' indexes, already point to expectations of less vibrant economic activity. But the outcome of trade wars launched by US president Donald Trump's administration is a bigger source of forecast uncertainty. Global trade growth rates are now below 2017 averages, the IMF said.

The IMF forecast incorporates the US and Chinese tariffs already in place that affect about half of US imports from China and 85pc of China's imports from the US. Senior US and Chinese negotiators will continue discussions in Washington later this month following a round of talks in Beijing two weeks ago. Trump and Chinese president Xi Jinping agreed to delay a further escalation in tariffs until 2 March while the two sides negotiate.

US trade negotiators are said to be dissatisfied with progress on resolving the so-called structural issues in trade with China - Washington's insistence on guarantees for cutting the US trade deficit, stronger IP protections and ending forced technology transfers. Publicly, at least, Trump insists that trade talks with China are going well. But he said on 19 January that existing tariffs would remain in place regardless of the outcome of talks.

The IMF left China's growth forecast unchanged at 6.2pc this year and next, down from a projected 6.6pc in 2018. In addition to the effects of the trade war with the US, the IMF also attributes the slower growth rate in China to regulatory actions reining in shadow banking activity and local government spending.

The IMF has lowered growth projections for major eurozone economies, in part because of recent regulatory actions - such as introduction of new automobile fuel emission standards in Germany last year - and political uncertainty in Italy and France. Prolonged uncertainty over the UK's planned exit from the EU hangs over the forecast for European economies. The IMF forecast is based on an assumption that London and Brussels will negotiate an agreement on the terms of their relationship prior to the UK's withdrawal from the EU. But the UK parliament rejected that proposed agreement in a vote last week, ahead of the 29 March scheduled withdrawal date.

The IMF downgraded its growth forecast for the Middle East and north Africa region, in part to take into account the Opec production cut agreement and US sanctions that limit oil exports from Iran. The IMF revised its growth forecast for Saudi Arabia down to 1.8pc this year, from the previous forecast of 2.4pc.

The forecast for the Latin American region is also revised lower, in part because of an even greater contraction in the crisis-struck Venezuelan economy than the IMF previously estimated. It also cut projections for Mexico on lower private investment. The downgrade is in line with advisories issued by private banks and credit ratings agencies following the assumption of power by Mexican president Andres Manuel Lopez Obrador in December.

The outlook for Mexico - as well as for the US and Canada - also remains dependent on ratification of the agreement signed late last year to replace the North American Free Trade Agreement (Nafta). Trump's confrontational tactics in dealing with US congressional Democrats may affect the US ratification process.