International Monetary Fund downgrades outlook for U.S., China as result of trade war

Ivan Schwartz
October 11, 2018

Lagarde said in a statement that the request came during her meeting with Pakistani finance minister Asad Umar, and central bank governor Tarik Bajwa on the sidelines of the International Monetary Fund and World Bank annual meetings in Bali.

The latest cut, announced on Sunday, will release a net 750 billion yuan ($108 billion) of liquidity into the banking system - money the PBOC said could help boost credit to small businesses, privately owned enterprises and innovating companies.

The IMF fears this could lead to sharp falls in markets.

It left 2018 growth forecasts for the two countries unchanged at 2.9% for the United States and 6.6% for China.

Indonesia's public sector debt is still below 30 percent of GDP, but a prolonged rupiah weakening would have negative repercussions on macroeconomic stability.

"It's this interaction between the buildup of vulnerabilities and the decline in asset prices that can generate adverse implications for macroeconomic activity", Tobias told a news conference.

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The downgrade reflects a confluence of factors, including the introduction of import tariffs between the U.S. and China, weaker performances by euro zone countries, Japan and Britain.

Lagarde said central bank rate increases such as those by the policy-setting US Federal Reserve were justified by fundamentals.

The announcement followed the highest single-day loss in a decade in the stock market, which plunged by over 1,300 points, losing nearly Rs 270 billion of its capitalisation.

That contrasts with a slowing in the euro area and Japan. Trump has justified the higher USA tariffs as a response to the trade imbalance between the two countries, and China has swiftly responded with higher levies on US imports.

"Since mid-April, rising United States interest rates and a stronger U.S. dollar - coupled with intensified trade tensions - have triggered a reversal in portfolio flows, an increase in borrowing costs, and a weakening in local currencies in some emerging markets", the report noted.

New IMF research shows emerging market countries excluding China could face debt portfolio outflows of up to $100 billion, a level last seen during the global financial crisis. "We know that risky behavior and unsustainable debt is a recipe for financial crisis". The IMF report warned that these efforts could undermine the de-risking agenda and "entail greater risks to financial stability over the medium term should they set back progress toward reducing financial vulnerabilities".

Amid heightened US-China tensions, the International Monetary Fund (IMF) revised Taiwan's GDP growth forecasts for 2018 and 2019 upward to 2.7% and 2.4% respectively in its latest World Economic Outlook report issued on Monday.

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