US sanctions threat will limit global economic recovery: IMF

The global economy has come under pressure from the threat of further trade sanctions by the US, social unrest and the climate emergency, limiting its recovery over the next two years, the International Monetary Fund has warned.

In its half-yearly update, the Washington-based lender of last resort said the global economy will grow by an estimated 3.3% in 2020, down from a previous forecast of 3.4%, and by 0.2% lower in 2021 to 3.4%.

A slowdown in emerging market economies last year and the dramatic slump in trade following a tit-for-tat tariff war between the US and China also reduced growth in 2019, leading the IMF to revise down its estimate last year to 2.9%.

As recently as 2017, the global economy grew by 3.8%. Before the financial crisis in 2006, it expanded at a much faster rate of 5.5%.

In reports published earlier this month, the UN and the World Bank signaled weaker growth this year, citing ongoing trade protectionism and growing debt crisis for creating uncertainty and limiting business investment.

The IMF said: “The downward revision primarily reflects negative surprises to economic activity in a few emerging market economies, notably India, which led to a reassessment of growth prospects over the next two years. In a few cases, this reassessment also reflects the impact of increased social unrest.”

It said the prospects for a durable resolution to trade and technology tensions between the US and China remained elusive, despite sporadic favorable news on ongoing negotiations.

It added: “Further deterioration in economic relations between the US and its trading partners (seen, for example, in frictions between the United States and the European Union), or in trade ties involving other countries, could undermine the nascent bottoming out of global manufacturing and trade, leading global growth to fall short of the baseline.”

While a long manufacturing recession in China, the US and much of Europe appeared to be coming to an end, or at least not deteriorating further, the downbeat report said recovery would be weak, especially in the usually buoyant emerging market economies.

South Africa, Mexico, and India were among countries suffering significantly from the uncertainty that dominated trading relationships in 2019.

The UK is expected to grow modestly and in line with the IMF’s previous forecast at 1.3% last year, 1.4% this year and 1.5% next year. This is based on an orderly exit from the EU later this year and a smooth transition to a new trading relationship from 2021.

According to the IMF, the main threat to its forecasts came from the growing costs of the climate crisis and the continuing use of sanctions on trading partners by the US. It also cited political wrangling between the US and Iran and the potential for social unrest to spread across the Middle East.

It said: “Weather-related disasters such as tropical storms, floods, heatwaves, droughts, and wildfires have imposed severe humanitarian costs and livelihood loss across multiple regions in recent years.

“Climate change, the driver of the increased frequency and intensity of weather-related disasters, already endangers the health and economic outcomes, and not only in the directly affected regions.

“It could pose challenges to other areas that may not yet feel the direct effects, including by contributing to cross-border migration or financial stress (for instance, in the insurance sector). A continuation of the trends could inflict even bigger losses across more countries.”

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