Risks are building in the global economy, with growth supported by increasingly unsustainable policies and global co-operation undermined by nationalist policies, the IMF warned on Tuesday.

The fund’s comments came as it revised down its economic forecasts modestly for most countries for this year and next in its twice yearly World Economic Outlook.

Positive features that drove economic momentum in 2017 were ebbing away and financial markets had not yet reflected the rise in threats to the world economy, the report said.

Warning that the world was now in “an environment where financial conditions could tighten suddenly and sharply,” the IMF urged countries “to advance policies and reforms — both multilaterally and at the country level — that extend the momentum and raise medium-term growth for the benefit of all, while building buffers for the next downturn”.

The fund had unusually stern words for the US, its largest shareholder, criticising the Trump administration’s imposition of tariffs and tax cuts near the top of the economic cycle and calling for both to be reversed.

It warned that if Donald Trump, US president, erected further trade barriers with China and imposed tariffs on the automotive sector, the combined effect would knock 1 per cent off the US economy in the long term and about half that from the global economy.

Mr Trump’s fiscal policy was “unsustainable”, it said, and the US should instead concentrate on stabilising and reducing the level of public debt.

“Procyclical stimulus, which is contributing to rising global imbalances and heightened risks to the US and global economies, should be withdrawn,” the report said.

With the global burden of public and private debt still growing, the IMF said financial vulnerabilities were increasing. The pressure was likely to mount because economic growth rates were expected to slow in the medium term. International co-operation was also undermined by rising inequality and the advance of populist governments following nationalist policies.

Maurice Obstfeld, the IMF’s chief economist, said: “With geopolitical tensions also relevant in several regions, we judge that, even for the near future, the possibility of unpleasant surprises outweighs the likelihood of unforeseen good news.”

The downbeat tone of the report contrasts with global growth forecasts only a little weaker than those the IMF published in April and updated in July. The global economy was set to grow 3.7 per cent in 2018 and 2019, it predicted, a downgrade of 0.2 percentage points in both years.

The 2018 downgrade stemmed mostly from weaker data than expected earlier this year in the eurozone, UK and Latin America.

The IMF said US growth this year was “exceptionally robust” on the back of historically low unemployment and tax cuts, but it downgraded its US growth forecast for 2019 by 0.2 percentage points to 2.5 per cent, to reflect the likely damaging effects of tariffs. The eurozone is expected to expand 1.9 per cent next year.

Growth in the US and eurozone is expected to slow in the medium term and converge at a sustainable rate of 1.4 per cent, the IMF thinks.

Forecasts for some emerging market economies, notably oil producers benefiting from the rise in crude prices this year such as Russia and Saudi Arabia, were revised higher. But the IMF sharply downgraded forecasts for crisis-hit Argentina and Turkey. Argentina’s economy is expected to shrink by 2.6 per cent this year and 1.6 per cent in 2019, while Turkey is expected to grow 3.5 per cent this year and 0.4 per cent in 2019, compared with growth of 7.4 per cent in 2017.

Reflecting an end to the global synchronised upswing of 2017, the IMF calculated that 45 poorer countries — accounting for 10 per cent of the global economy — would see their living standards fall further behind those of rich countries over the next five years.

To address the darkening outlook, the IMF recommended countries focused on policies that would generate inclusive growth and rising wages. Even with historically low unemployment in advanced economies, wage growth has not picked up.

The fund also urged countries to improve their public finances and consolidate their budgets so they would have more firepower in the next downturn.

Germany, with its low public debt and high trade surplus, was singled out as an exception. Angela Merkel’s government was urged to invest more to improve infrastructure and raise long-term growth performance.


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