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IMF cuts China 2019 growth forecast as trade war intensifies

The US has doubled import duties on some Chinese goods. Photo: Getty Images

The International Monetary Fund on Tuesday lowered its forecast for Chinese economic growth in 2019, saying that the escalating trade war with the United States will drag on the world's second-largest economy.

The IMF's latest World Economic Outlook predicted that China's economy would grow 6.2 percent next year, down from an early forecast of 6.4 percent, citing the "negative effect of recent tariff actions".

Both of those figures would mark the slowest rate of expansion for China since 1990.

But the IMF, which released its predictions for the world economic system at its annual meeting in Bali, Indonesia, warned that China's economy could decelerate further if the trade conflict deepens.

"The forecast does not incorporate the impact of further tariffs on Chinese and other imports threatened by the United States, but not yet implemented, due to uncertainty about their exact magnitude, timing, and potential retaliatory response," the IMF said.

China's rate of growth could decline by as much as a full percentage point or more by 2019 if a "worst-case" scenario materializes, involving further tariffs, a commensurate Chinese counter-response and a collapse in confidence by businesses and markets.

While saying Chinese growth "remained strong", the IMF added that Beijing policymakers were navigating a "difficult trade-off between growth and stability".

China is trying to move away from its long-time reliance on heavy industry and manufactured exports towards a growth model based more on domestic consumption by its increasingly wealthy populace.

But the already tricky transition has been complicated by US President Donald Trump's use of import tariffs to punish China for what he considers predatory trade practices.

The trade war has already forced China to moderate its own tough campaign to crack down on excessive credit, initiated following growing warnings that it was sitting on a debt time bomb.

It has recently taken a more accommodating stance to help buffer China's economy from the US trade measures.

The IMF warned Beijing not to completely shelve the debt clean-up and other regulatory reforms, saying that could "encourage risk-taking, leading to a further buildup of financial vulnerabilities".

The IMF maintained a previous forecast for growth of 6.6 percent for 2018. China's economy grew 6.9 percent in 2017.

The financial organization also cut its growth forecast for the United States.

Despite healthy momentum in the United States, which received a boost from recent tax cuts, IMF economists now expect growth to slow to 2.5 percent next year from 2.9 percent this year. They cut the 2019 forecast by 0.2 percentage points because of the trade conflict.

The Trump administration has slapped tariffs this year on roughly half of the products that China sells to the United States annually. Trump has threatened to expand the tariffs to cover all US imports from China. Beijing has responded with tariffs on American goods worth more than $110 billion.

"If you have the world's two largest economies at odds, that's a situation in which everyone is going to suffer," said Maurice Obstfeld, chief economist at the IMF.

The report was written before the United States, Canada and Mexico finalized an updated trade deal. Many business leaders welcomed the agreement as an encouraging sign that the Trump administration does not entirely want to blow up the global trading system that has come together in the past three decades.

Trade war will harm global growth

Trump's trade war with China and Europe is forecast to hit global growth this year and reverberate through 2019, the IMF warned.

The escalation of the US president's protectionist policies has dragged down the forecast for growth this year and next, with the world's largest trading countries, including the United States, France, Germany and China, among the hardest hit.

Britain is also expected to suffer slower growth against a backdrop of trade conflicts, though Brexit uncertainty continues to inflict the most harm to the United Kingdom's outlook for expansion this year and next, IMF officials said.

The IMF said that even without a further deterioration in United States and China relations, the global economy would grow this year at 3.7 percent and at the same rate in 2019 compared with the 3.9 percent it predicted for both years in an interim report in April.

The Washington-based lender's economists are usually reluctant to name and shame individual countries, but it is clear that attacks by the Trump administration on the postwar consensus of open trade and cooperation over issues such as climate change has prompted more direct references to the United States than previously seen.

In its World Economic Outlook, officials warned that the lingering threat of higher trade barriers meant there was a greater likelihood it would downgrade its growth forecasts during its next review.

Germany was expected to grow this year and next at an annual rate above 2 percent but IMF officials judged that the impact of trade tariffs would mean Berlin should expect to reach no more than 1.9 percent in each of the next two years. France was the other major eurozone country predicted to suffer falls in growth in 2018-19.

The United Kingdom's outlook for next year remains at 1.5 percent but the previous forecast for a 1.3 percent growth rate this year was cut to 1.1 percent after Brexit uncertainty weighed more heavily on trade and investment.

The IMF said: "Escalating trade tensions and the potential shift away from a multilateral, rules-based trading system are key threats to the global outlook."

"An intensification of trade tensions, and the associated rise in policy uncertainty, could dent business and financial market sentiment, trigger financial market volatility, and slow investment and trade."

In a further swipe at Trump, the IMF said that countries needed to work together to tackle challenges that extended beyond their own borders. Not only were nationalist trade policies harming growth but "cooperative efforts are also essential for completing the financial regulatory reform agenda, strengthening international taxation, enhancing cybersecurity, tackling corruption, and mitigating and coping with climate change", it said.

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