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Major trade rift could imperil solid global economy, IMF says

April 17, 2018

The International Monetary Fund has upgraded its economic outlook for the United States in 2018 and foresees a strong year for the global economy as well. But its chief economist warns that the prospect of an escalating trade conflict "threatens to undermine confidence and derail global growth prematurely."

The IMF predicts that the U.S. economy will grow 2.9 percent this year, up from the 2.7 percent it had forecast in January and up from the 2.3 percent growth the economy achieved last year. The U.S. economy will enjoy a boost through 2020 from tax cuts President Donald Trump signed into law in December, the IMF predicts.

The lending agency kept its forecast for worldwide growth this year at 3.9 percent, which would be its fastest pace since 2011.

But the IMF's chief economist, Maurice Obstfeld, told reporters that a major trade conflict could change things.

Speaking at a news conference, Obstfeld said that the IMF had run economic simulations about the impact of a far-reaching trade war that would include across-the-board tariffs of 10 percent. The computer simulations, he said, showed a "fairly substantial" impact from tariffs of that magnitude.

Global financial markets could also endure damage from rising threats of tariffs, Obstfeld said. Investors have already endured stomach-churning swings this year as markets have wildly in response to the perceived likelihood of a trade conflict, especially resulting from actions and statements by the Trump administration.

Obstfeld said that while the IMF didn't take account of rising trade tensions in its baseline economic forecasts, the consequences could be serious enough to trigger an economic downturn.

"If you keep poking at the economic expansion, it could turn around and bite you," Obstfeld said.

There aren't "going to be any winners coming out of a trade war."

The IMF issued the update to its World Economic Outlook on the eve of spring meetings in Washington this week of the 189-nation IMF, the World Bank and the Group of 20 major economies.

In its base forecast, the IMF predicted that trade would grow 5.1 percent this year, which would be the fastest pace since 2011.

Trump, who campaigned on a pledge to protect U.S. industries from what he argues is unfair foreign competition, has slapped tariffs on steel and aluminum imports. He has also proposed imposing tariffs on $50 billion in Chinese imports to punish Beijing for its aggressive attempts to obtain foreign technology.

China has countered by proposing tariffs on $50 billion in U.S. products, including soybeans — a highly valuable export for America's farm belt — and small aircraft. Trump has, in turn, ordered the U.S. trade representative to consider targeting up to an additional $100 billion in Chinese imports.

The prospect of a trade war between the world's two biggest economies has rattled financial markets for weeks. For now, though, the global outlook remains sunny, thanks to low borrowing rates and increasing trade and investment.

The IMF upgraded its forecast for the 19-country eurozone to 2.4 percent — which would be its best showing since 2007 — and up from the 2.2 percent it predicted three months ago. The eurozone, which emerged only slowly from its 2011-2012 debt crisis, is expected to benefit from continued low rates.

China is projected to grow 6.6 percent this year, decelerating from 6.9 percent growth in 2017. The world's second-biggest economy is attempting a transition from super-fast growth based on often-wasteful investment to slower but steadier growth built increasingly on consumer spending.

India is expected to outpace China, registering 7.4 percent growth this year. Japanese economic growth is forecast to decelerate to 1.2 percent from 1.7 percent in 2017. Japan's economy has long been hobbled by an aging workforce and dwindling population.

A recovery in the prices of commodities such as oil, which imploded in 2014-2015, likely will help developing economies this year. Sub-Saharan Africa's economy is expected to grow 3.4 percent this year, up from 2.8 percent in 2017. Latin America is forecast to expand 2 percent this year, up from 1.3 percent in 2017.

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