What's going on?
On Wednesday, the International Monetary Fund (IMF – a sort of bank for countries) cut its forecast for China’s economic growth – and although unsurprising, the rest of the world is still on tenterhooks…
What does this mean?
The IMF was perhaps a day late to the party: on Tuesday, the World Bank lowered its forecasts for global economic growth – citing the ongoing trade war between the US and China as a key reason. China comprises one third of global growth, so a slowing Chinese economy reduces the world’s economic speed (tweet this).
China thinks its economy will grow between 6% and 6.5% this year, its lowest annual rate since 1990. And the IMF’s lowered forecast of 6.2% puts it right in that ballpark, albeit below estimates made by other economists – who perhaps expect a larger impact from the government’s growth-boosting measures like $300 billion worth of tax cuts.
Why should I care?
For markets: Central banks are stepping in.
On Tuesday, Australia’s central bank cut interest rates to record lows. The country’s been experiencing sluggish growth – lower rates should encourage lending and spending, stimulating economic growth. Stateside, the Federal Reserve’s chair said the bank would do the needful to sustain American growth. And the European Central Bank is likely to announce further details on Thursday of its growth-boosting plan to offer low cost long-term loans to eurozone banks – in the hope of encouraging those banks to lend to companies that’ll then spend.
The bigger picture: Lower interest rates miss the applause.
The Fed said in March that it wouldn’t raise interest rates in 2019 – but simultaneously lowered its growth projections. Investors may have worried that any potential benefits – such as companies borrowing and spending more – would be lost. But a potential rate cut (as some investors expect) alongside unchanged economic growth forecasts might soon be warmly welcomed by investors.