IMF spots trouble ahead as solid world growth poised to slow

Washington

THE IMF predicted the world economy's strongest upswing since 2011 will continue for the next two years, but warned the seeds of its demise may have already been planted.

The fund on Tuesday left its forecasts for global growth this year and next at the 3.9 per cent it estimated in January and raised its outlook for the US as Republican tax cuts take effect.

Beyond that horizon, it was more pessimistic, projecting global growth will fade as central banks tighten monetary policy, the US fiscal stimulus subsides, and China's gradual slowdown continues.

"Global growth is projected to soften beyond the next couple of years," the IMF said in its latest World Economic Outlook report. "Once their output gaps close, most advanced economies are poised to return to potential growth rates well below pre-crisis averages, held back by aging populations and lacklustre productivity." The IMF warned the expansion could be derailed if countries resort to tit-for-tat trade sanctions.

"The first shots in a potential trade war have now been fired," IMF chief economist Maurice Obstfeld said in a foreword to the fund's outlook, reiterating the IMF's warning earlier this month that the global trading order is in danger of being "torn apart". "Conflict could intensify if fiscal policies in the US drive its trade deficit higher without action in Europe and Asia to reduce surpluses," he said.

In a press conference later on Tuesday, Mr Obstfeld called the current trade frictions "more of a phoney war", referring to the period of limited conflict at the start of World War II. "There's still room for countries to engage in a more multilateral set of discussions to take advantage of the set of dispute resolution mechanisms that are in place to avoid an intensification," he said, adding that all countries would lose in a trade war.

Globally, growth is being driven by a surge in business spending and a recovery in trade volumes, according to the IMF. Last year, the expansion covered two-thirds of countries, accounting for three-quarters of global output, making it the broadest upswing since 2010 when the world was coming out of the financial crisis. But there are signs the synchronised recovery may be becoming a little more uneven, at least in the short term, with the US charging ahead, fuelled by tax cuts and government spending. BLOOMBERG