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07

US trade wars could cut global GDP by 0.5%

Open-access content 18th July 2018

US president Donald Trump’s tariff threats could spark a global recession if trade tensions escalate and business confidence falls, the International Monetary Fund (IMF) has said.

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The organisation's latest World Economic Outlook forecasts global growth rates of around 3.9% for this year and the next, but warns that international trade disputes have put this at risk.

It predicts that the US could face retaliation from China, the EU, Canada, Mexico and Japan if it raises tariffs on these countries, causing global GDP to fall by 0.5% below 2020 projections.

"The risk that current trade tensions escalate further - with adverse effects on confidence, asset prices, and investment - is the greatest near-term threat to global growth," the IMF said.

"As the focus of global retaliation, the US finds a relatively high share of its exports taxed in global markets in such a broader trade conflict, and it is therefore especially vulnerable."

Despite these risks, global growth remains strong, with advanced economies set to see GDP expansion of 2.4% this year, with emerging and developing ones growing by 4.9%

However, the IMF said other threats have become more prominent in recent months, particularly in Europe, where migration challenges and Brexit negotiations have heightened political uncertainty.

It warned that financial markets seem broadly complacent to these risks, with elevated valuations and compressed spreads in many countries, despite high levels of debt creating widespread vulnerability.

The IMF urged governments to "resist inward-looking thinking", and said multilateral cooperation would be vital on a range of issues, including global financial stability. 

It also warned that a "widespread political malaise" was driving many current policies, including on trade, and that this had its roots in experiences of economic inequality among countries.

"It is urgent to address the underlying trends through equity- and growth-friendly policies, while assuring macroeconomic tools are available to fight the next economic slowdown. Otherwise, the political future will only darken," it concluded.


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This article appeared in our July 2018 issue of The Actuary.
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