Investors underestimate risk of a financial shock, International Monetary Fund warns

Ivan Schwartz
October 12, 2018

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.

China's economy could also take a hit: The IMF revised its forecast for economic growth in 2019 down to 6.2 percent, slightly lower than previous estimates and down from 6.6 percent this year.

The UK economy is expected to grow by 1.4 percent this year - down from April's prediction of 1.6 percent - while predicted growth for 2019 remains at 1.5 percent, a slowdown from 1.7 percent in 2017.

At a news conference at the International Monetary Fund and World Bank annual meetings in Bali, Obstfeld said Pakistan is facing financing gaps as it has been hit by a large fiscal and current account deficit, a low level of reserves and a currency he described as "too rigid" and over-valued.

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Prominent US academic Jeffrey Sachs was less diplomatic in his assessment of Trump's shepherding of American trade relationships, slamming the president's repeated claims that deficits with China and other nations meant Americans were being taken advantage of.

Regionally the growth forecast for the Middle East and North Africa was lowered by 1.2 and 1.3 percentage points to 2 and 2.5 per cent for this year and 2019.

To offset the effects of Federal Reserve rate rises, U.S. trade tariffs and domestic economic pressure caused by tighter financial regulation aimed at reducing debt risks in China's financial system, the Chinese authorities have eased monetary policy and the implementation of proposed new financial regulations.

The IMF on Tuesday cut its global growth forecasts due to an escalating U.S.

US / China trade war and Brexit threaten global growth says IMF

Growth of less than five percent would be unprecedented for China since it began its economic reforms in the 1970s, and complicate its efforts to move towards a more balanced economy with a greater role for services.

The IMF said higher trade barriers could disrupt global supply chains, slow the spread of technology and ultimately lower global productivity and welfare.

"We're seeing more and more countries, China included, let their currencies fluctuate", Lagarde said.

Lagarde said she would meet Pakistani officials on Thursday, with expectations that Islamabad will request a bailout of its shaky economy.

A bull run has taken USA equities to record highs this year.

Meanwhile, Dr Obstfeld is concerned that several economies have adopted policies that are "unsustainable over the longer term" to boost growth.

It also said interest rates would need to rise to curb inflation, but urged the Bank of England to remain "flexible" depending on what happens with Brexit.

Already the Federal Reserve interest rates hikes are increasing pressure on emerging market economies by fueling an outflow of capital as investors seek higher returns, while increasing borrowing costs at the same time.

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