IMF warns U.S. vulnerable in escalating trade fight

WASHINGTON (Reuters) – The International Monetary Fund warned on Monday that escalating and sustained trade conflicts are increasingly likely, threatening to derail economic recovery and depress medium-term growth prospects.

The IMF, in an update to its World Economic Outlook growth forecasts, said that the United States, as the focus of retaliatory tariffs from trading partners, was especially vulnerable to a slowdown in its exports.

An escalation of tariffs to levels threatened by the United States, China and other countries would not only have a direct effect on demand, but would heighten uncertainty and hurt investment, the IMF said.

“Our modeling suggests that if current trade policy threats are realized and business confidence falls as a result, global output could be about 0.5 percent below current projections by 2020,” IMF chief economist Maury Obstfeld said in a statement.

“As the focus of global retaliation, the United States finds a relatively high share of its exports taxed in global markets in such a broader trade conflict, and it is therefore especially vulnerable,” Obstfeld added.

The IMF left unchanged its global growth forecasts at 3.9 percent for both 2018 and 2019, compared to its previous forecast issued in April.

Forecasts for the United States and China were both unchanged, with U.S. growth pegged at 2.9 percent in 2018 and 2.7 percent in 2019. China’s growth was forecast at 6.6 percent in 2018 and 6.4 percent in 2019.

But the Fund cut its 2018 growth forecasts for euro zone countries, Japan, and Britain, citing a softer than expected first quarter performance coupled with tighter financial conditions partly due to political uncertainty.

The euro zone’s 2018 growth forecast was cut to 2.2 percent from 2.4 percent, with Britain cut to 1.4 percent from 1.6 percent. Japan’s growth projection was cut to 1.0 percent from 1.2 percent.

The IMF also trimmed 2018 forecasts for some emerging market countries, notably a half percentage point cut for Brazil to 1.8 percent due to the lingering effects of labor strikes and political uncertainty.

The Fund also cut India’s growth rate by a tenth of a point to 7.5 percent due to the negative effects of higher oil prices on domestic demand and faster than anticipated monetary policy tightening due to higher inflation.

The IMF revised slightly upward 2018 forecasts for Saudi Arabia and several Commonwealth of Independent States countries other than Russia.

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