IMF CUTS WORLD ECONOMIC GROWTH FORECASTS ON TARIFFS, STRAINS
KUWAIT CITY, Oct 9, (Agencies): The economy of Kuwait is expected to grow by 2.33 percent this year and 4.06 percent in 2019 according to the World Economic Outlook that the International Monetary Fund (IMF) released Tuesday.
Oman is predicted to be the fastest growing economy next year with expected growth of 1.88 percent in 2018 and 5.05 percent in 2019; while the United Arab Emirates (UAE) is expected to grow by 2.91 percent in 2018 and 3.66 percent in 2019, Qatar by 2.69 percent in 2018 and 3.66 percent in 2019, Saudi Arabia by 2.23 percent in 2018 and 2.43 percent in 2019, and Bahrain by 3.24 percent in 2018 and 2.59 percent in 2019.
The IMF on Tuesday predicted Iran’s economy will sink deep in the red due to renewed US sanctions but forecast increased Saudi growth on the back of higher oil production.
In its World Economic Outlook, the IMF said the oil-dependent economy of the Islamic republic is expected to shrink by 1.5 percent this year and by 3.6 percent in 2019. In May, before US President Donald Trump announced reinstating sanctions against Tehran, the IMF had projected Iran’s economy would grow by 4.0 percent in 2018 and again next year.
The IMF said the Iranian economy was now expected to contract over the next two years “on account of reduced oil production, before returning to modest positive growth in 2020- 23”. Trump withdrew the United States from the 2015 nuclear deal between Iran and world powers in May, and his administration reimposed a round of sanctions on the Islamic republic in August.
Iranian crude exports, which reach some 2.5 million barrels per day normally, have plunged by over half a million bpd and are expected to dive further when expanded sanctions on oil take effect next month, depriving Tehran of its main source of income.
The IMF, however, lifted its projections for economic growth in Saudi Arabia, the region’s biggest economy. It said the Saudi economy, which contracted by 0.9 percent last year, is expected to grow by 2.2 percent in 2018 and 2.4 percent next year, raising previous projections by 0.5 percent.
The growth is being “driven by a pickup in non-oil economic activity and a projected increase in crude oil production in line” agreed by the Organization of the Petroleum Exporting Countries and independent producers, the IMF said. Oil prices, which account for about 80 percent of Saudi public income, have increased by more than 70 percent since June last year to over $80 a barrel.
The London-based Capital Economics think-tank said last week that revenues of Saudi Arabia and the five other Gulf states are expected to rise by $200 billion this year compared to 2017 due to high oil prices and output. The IMF said in an update to its World Economic Outlook it was now predicting 3.7 percent global growth in both 2018 and 2019, down from its July forecast of 3.9 percent growth for both years.
The downgrade reflects a confluence of factors, including the introduction of import tariffs between the United States and China, weaker performances by eurozone countries, Britain and Japan, and rising interest rates that are pressuring some emerging markets with capital outflows, notably Argentina, Brazil, Turkey, South Africa, Indonesia and Mexico. “US growth will decline once parts of its fiscal stimulus go into reverse,” IMF chief economist Maurice Obstfeld said in a statement.
“Notwithstanding the present demand momentum, we have downgraded our 2019 US growth forecast owing to the recently enacted tariffs on a wide range of imports from China and China’s retaliation.” With much of the US-China tariff war’s impact to be felt next year, the Fund cut its 2019 US growth forecast to 2.5 percent from 2.7 percent previously, while it cut China’s 2019 growth forecast to 6.2 percent from 6.4 percent. It left 2018 growth forecasts for the two countries unchanged at 2.9 percent for the United States and 6.6 percent for China. Obstfeld said he was not concerned about the Chinese government’s ability to defend its currency against further weakening but told a news conference that Beijing would face a “balancing act” between actions to shore up growth and ensuring financial stability.
If China and the United States were to resolve their trade differences, it “would be a significant upside to the forecast.” The eurozone’s 2018 growth forecast was cut to 2.0 percent from 2.2 percent previously, with Germany particularly hard hit by a drop in manufacturing orders and trade volumes. Obstfeld said the IMF does not see a generalized pullback from emerging markets, nor contagion that will spill over to those emerging economies which have stronger economies and have thus far avoided major outfl ows, such as some in Asia and some oil and metals exporting countries. “But there is no denying that the susceptibility to large global shocks has risen,” Obstfeld said. “Any sharp reversal for emerging markets would pose a significant threat to advanced economies.” Brazil will see a 0.4 percentagepoint drop in GDP growth to 1.4 percent for 2018 as a nationwide truckers strike paralyzed much of the economy. Iran, facing a new round of US sanctions next month, also saw its growth forecast cut, the IMF said. Some energy-rich emerging market countries have fared better due to higher oil prices, with Saudi Arabia and Russia receiving upgrades to growth forecasts.
The IMF said the balance of risks was now tilted to the downside, with a higher likelihood that financial conditions will tighten further as interest rates normalize, hurting emerging markets further at a time when US-led demand growth will start to slow as some tax cuts expire. Trade tensions are expected to continue although Fund officials view USMexico- Canada trade agreement as a positive sign. “Where we are now is we’ve gotten some bad news. Our probability that we would attach to further bad news has gone up,” Obstfeld said.
In a new simulation exercise to show trade war risks to the global economy, the IMF modelled the effect of an allout US-China trade war, coupled with threatened global US automotive tariffs and retaliation from trading partners. The model also includes the effects of a reduction in business confidence that reduces investment and leads to a tightening of financial conditions. It found that global GDP output under this scenario would fall by more than 0.8 percent in 2020 and remain roughly 0.4 percent lower in the longterm compared to levels without the effects of a trade war. The repercussions for the United States and China would be particularly severe, with 2019 GDP losses of more than 0.9 percent in the United States and 1.6 percent in China in 2019.
The exercise assumes that Trump imposes tariffs on the remaining $267 billion worth of Chinese goods imports not already under punitive tariffs and China retaliates in kind. It also assumes that Trump imposes a 25 percent tariff on imported cars and auto parts. Adjustments would occur as domestic production displaces higher-priced imports, the model shows, but in the long run, the US GDP would still be 1.0 percent below a baseline without these tariffs, while China’s GDP output would be one half percent below the baseline.