Shipping containers are loaded and unloaded from cargo ships at the Port of Everglades in Fort Lauderdale, Florida, U.S., on Friday, Jan. 29, 2016. The U.S. Census Bureau is scheduled to release international trade balance figures on February 5. Photographer: Ty Wright/Bloomberg
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Political risk in advanced economies has emerged as the biggest threat to the global economy, the International Monetary Fund warned on Tuesday as it lowered its growth forecasts for the US and other rich economies.

Low growth and a slow recovery from the 2008 crisis were fuelling “political tensions [which] have now made advanced economies a major locus of policy uncertainty”, the IMF's chief economist, Maurice Obstfeld, said as he unveiled the fund’s latest World Economic Outlook.

Growth “has been too low for too long, and in many countries its benefits have reached too few — with political repercussions that are likely to depress global growth further”, he said.

The IMF said it now expected the US economy to grow just 1.6 per cent this year and the UK’s economy to in 2017 to grow at half the rate it predicted before the June vote to exit the EU. In both cases the fund made clear that politics were weighing on the economies, with uncertainty about November 8 election in the US contributing to a lag in investment. 

The threat by Republican candidate Donald Trump to unwind Washington’s longstanding policy of pushing trade liberalisation injected a new level of uncertainty into a global economy already seeing an increase in protectionist measures. “And as we know uncertainty is not great for investors and for employment,” Mr Obstfeld said. But “it’s very hard to know what would happen after the election given the various checks and balances within the US government”.

The IMF lowered its forecast for advanced economies as a whole to 1.6 per cent growth this year. 

However, it said a rebound in emerging and developing economies — which the IMF now expects to grow 4.2 per cent this year as a group — would offset that figure, resulting in its forecast for global growth remaining steady at 3.1 per cent this year.

The most dramatic repercussion to date has been the UK’s decision to leave the EU, which would contribute to years of uncertainty for the UK and Europe, Mr Obstfeld said.

The IMF raised its forecast slightly for UK growth this year to 1.8 per cent but said it expected a slide to growth of just 1.1 per cent in 2017, half the 2.2 per cent it predicted in April before the referendum. Anger over the refugee crisis in Europe also meant “centrifugal forces across the continent are making it harder to advance or even maintain political reforms”, Mr Obstfeld added.

The IMF said it now expected global growth to rise slightly to 3.4 per cent next year. Among factors that could derail this was a sharp rise in trade barriers, Mr Obstfeld said. Mr Trump has proposed raising tariffs on China and Mexico, in a move many economists believe could set off a new tit-for-tat trade war with some of the US’s biggest trading partners — with dire consequences for the US and global economy.In contrast, Mr Obstfeld said, what the global economy needed now was a “renewed commitment to lowering trade barriers”.

This year’s move “sideways” for the global economy hid what were still significant risks fed by a “cocktail of interacting legacies” from the 2008 global financial crisis. These included high debt overhangs, bad loans on banks’ books and moribund investment, which were continuing to depress the global economy’s potential output.

The IMF’s slashing of its US growth forecast highlights the dilemma facing the Federal Reserve. Its decision to put further tightening on hold after last December’s rate increase, the first in almost a decade, was the appropriate response to growing uncertainty, the IMF said. Any further increase, which some economists expect to come as soon as December, “should be gradual and tied to clear signs that wages and prices are firming durably”, the fund said.

But Mr Obstfeld said: “It is not out of the question that at some point in the next few months it would be appropriate to raise rates.”

The dimmer outlook for advanced economies came as the IMF said it expected large emerging economies such as Brazil and Russia to emerge from recession next year, contributing to the slight increase in its growth forecast for emerging economies as a whole.

In China, it said authorities were managing well the economy’s rebalancing to a more services and consumption-driven model, with growth expected to be 6.6 per cent this year, slowing to 6.2 per cent in 2017. 

But the continued growth of non-financial debt at what the IMF said was an unsustainable pace, and a growing misallocation of resources, “cast a shadow over the medium-term outlook”.

India, meanwhile, was expected to continue its recent strong growth, with the economy due to remain the fastest growing among major economies, expanding 7.6 per cent in the 2016-17 fiscal year.

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