What's going on?
On Tuesday, the International Monetary Fund (IMF – a sort of bank for countries) slashed its forecasts for global economic growth in 2018 and 2019 (tweet this).
What does this mean?
The IMF’s now expecting the global economy to grow by 3.7% this year and next, down from 3.9% in its last report in April. The culprits? Ongoing trade tensions between the US and China. The back ‘n’ forth trade war spurred the IMF to knock 0.2% off its forecasts for both countries’ economic growth in 2019. Emerging markets (EMs) are also to blame according to the IMF – it cut its 2019 economic growth expectations for countries like Brazil, Argentina, and Turkey by 0.4%.
Why should I care?
For markets: Well, that escalated… slowly.
Trade tensions have been rising for a while, creating uncertainty for companies and investors alike. Companies (like carmakers) have been lowering their profit expectations thanks to higher costs from import taxes, or lower sales (if they’ve increased prices). This ultimately contributes to lower economic growth if fewer goods are being produced. The IMF thinks that if the trade war continues, it could have an even bigger effect on the global economy. Next year, China’s output could fall by at least 1.6% and the US’s by 1%. By 2020, the global economy may be growing almost 1% slower than it would be without the trade war.
The bigger picture: It’s the tough times that bind them.
Several emerging markets have had unrelated issues at the same time. Turkey’s stubbornly-high inflation contributed to investors fire-selling its currency in August. And investors ditched Argentina’s peso after the country asked the IMF for accelerated delivery of its emergency loan – brewing up a storm in an EM teacup. Additionally, countries like India – which imports 70% of its energy – might find rising oil prices leave less cash in the country’s coffers to invest in growing the economy.