IMF Weighs The Cost Of The US-China Rift

Screenshot of cover of MF's October 2019 World Economic Outlook and China data chat. Illustration credit: Bystander Media.The global economy is slowing. The US-China trade dispute is a big part of that. The International Monetary Fund’s latest update to its World Economic Outlook has reduced the forecast for global economic growth to the slowest since the 2008 global financial crisis, with the trade dispute between Beijing and Washington reducing global GDP in 2020 by 0.8 of a percentage point. For China, in particular, the Fund also factors in the fact that backing off deleveraging to prop up domestic demand has further dampened the outlook.

Growth has also weakened in China, where the regulatory efforts needed to rein in debt and the macroeconomic consequences of increased trade tensions have taken a toll on aggregate demand. Growth is projected to continue to slow gradually in coming years, reflecting a decline in the growth of the working-age population and gradual convergence in per capita incomes.

The IMF is now forecasting GDP growth for China of 6.1% this year and 5.8% in 2020.  That is a trim of 0.1 of a percentage point and 0.2 respectively from its forecast made as recently as July, and of 0.2 and 0.3 from its April forecast. China’s GDP growth last year came in at 6.6%. The Fund’s projections for the global economy are for a slowdown to 3.0% this year from 3.6% in 2018 but picking up to 3.4% in 2020.

As noted earlier, the Fund estimates that US-China trade tensions will cumulatively reduce the level of global GDP in 2020 by 0.8 percentage points. Global monetary easing in the absence of inflationary pressures has helped offset that. In addition, both Beijing and Washington have turned to fiscal stimulus to counter the negative impact of their tit-for-tat tariffs.

One the net effects of this is that while the emerging and developing economies of the region will remain the main engine of the global economy, their growth is what the Fund calls ‘softening gradually’ as China undergoes a structural slowdown. The Fund expects China’s economy to be growing at 5.5% by 2024.

The Fund’s policy prescriptions for pursuing sustainable and quality economic growth while navigating headwinds from trade tensions and weaker global demand offer some pointers as to where Beijing may be willing to make concessions to Washington that are in its long-term interest.

Any further stimulus should emphasize targeted transfers to low-income households, rather than large-scale infrastructure spending. In support of the transition to sustainable growth, regulatory efforts to restrain shadow banking have helped lessen reliance on debt, but corporate leverage remains high and household debt is growing rapidly. Further progress with reining in debt requires continued scaling back of widespread implicit guarantees and enhancing the macroprudential toolkit. Meanwhile, continuing with reducing the role of state-owned enterprises and lowering barriers to entry in such sectors as telecommunications and banking would help raise productivity while improving labor mobility. Moving toward a more progressive tax code and higher spending on health care, education, and social transfers would help lower precautionary saving and support consumption.

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Filed under China-U.S., Economy

One response to “IMF Weighs The Cost Of The US-China Rift

  1. Pingback: Slowing Growth’s Growing Challenge | China Bystander

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