IMF warns of danger of global economic slide

The IMF has sounded a warning that the world is at risk of a sharp downturn, as the global ­economy slows faster than ­expected.

The International Monetary Fund has sounded a warning that the world is at risk of a sharp downturn, as the global ­economy slows faster than ­expected amid trade conflicts and rising debts.

China yesterday reported that 2018 had brought its slowest economic growth in almost 30 years of 6.6 per cent, highlighting a key IMF concern, that China’s slowdown was deeper than expected.

The IMF’s review is consistent with government warnings that the Australian economy faces “storm clouds” ahead.

Josh Frydenberg will today outline the government’s economic agenda ahead of the federal election, in a speech declaring that the Australian economy remains strong and has “the flexibility and resilience to respond to challenges” from the global economy.

IMF chief economist Gita Gop­inath said although 2018 brought some of the best global growth since before the financial crisis a decade ago, “the global ­expansion is weakening and at a rate that is somewhat faster than expected”.

The fund has cut its forecast for economic growth this year from the 3.7 per cent estimate made last October to 3.5 per cent.

Until the middle of last year, it expected growth this year would hit 3.9 per cent.

“The downward revisions are modest; however, we believe the risks to more significant downward corrections are rising,” Ms Gopinath said.

 

The report said there was a danger of a “broader deterioration in investor sentiment and a sudden, sharp repricing of assets amid elevated debt burdens”. It added that this would cause growth to fall short of the IMF’s projections.

The IMF said a key risk for the global outlook was that China’s slowdown was deeper than expected. “As seen in 2015-16, concerns about the health of China’s economy can trigger abrupt, wide-reaching sell-offs in financial and commodity markets,” the IMF review said.

In advance extracts of the Treasurer’s speech to the Sydney Institute today, he says the global outlook has been changed by the persistent trade tension, high global debt levels and a contraction in several significant economies, including Japan and Germany.

“Domestically, the drought is having an impact, the housing market has softened, there are signs that credit growth has been constrained and the pick-up in wages growth remains gradual,’’ he says. “It’s against this backdrop that our economic plan with its focus on growth, aspiration and budget repair takes on even greater significance as we navigate the currents ahead.”

Labor Treasury spokesman Chris Bowen said last night the IMF economic review contained a warning for Australia that had been ignored by the government. He noted that Ms Gopinath had called for nations to ensure that their budget policy kept public debt at a sustainable level while protecting the most vulnerable.

“Labor is the only major party with economic and tax policies designed to restore the fiscal buffers and pay down debt in a fair way,” Mr Bowen said.

Business leaders have voiced concern that Australia is not ready to face an economic downturn. Business Council chief executive Jennifer Westacott said the nation has “done almost nothing to prepare ourselves for things that are beyond our control”.

Australian Industry Group chief executive Innes Willox told The Australian this week that Australia’s growth was slowing and there was “a grave risk that a blend of denial and complacency will see this downward drift continue”.

The IMF said countries should guard against any further deceleration in their economies and strengthen resilience.

China’s national accounts yesterday showed annual growth in 2018 was 6.6 per cent — the slowest annual increase since 1990 — while output in the December quarter was 6.4 per cent higher than a year earlier.

The growth report was in line with expectations and the ­government’s target, but brought some scepticism from economists who believe the real growth rate of the Chinese economy is considerably lower.

ANZ chief China economist Raymond Yeung noted that the GDP figure did not reflect the volatility in the value added by its industry. The director of China’s National Bureau of Statistics, Ning Jizhe, acknowledged that the economy faced “downward pressure” because of a “complicated and severe external environment”, referring to the trade conflict with the US. However, he said the economy overall was driven by the level of domestic demand, which he said would deliver reasonable growth over the year ahead.

The IMF expects China’s growth to slow further to 6.2 per cent this year. It said the slower growth in 2018 (down from 6.8 per cent in 2017) was caused both by the trade conflict with the US and the efforts of Chinese authorities to strengthen financial regulation, curbing both off-balance investments by local governments and unregulated “shadow banking”. It noted authorities had responded to the slowdown by easing financial regulation, injecting liquidity into the banks and with budget spending on infrastructure stimulus. “Activity may fall short of expectations, especially if trade tensions fail to ease,” the report said.

The IMF identified trade conflict and increasingly difficult conditions in financial markets as the biggest threats to the outlook.

Ms Gopinath said while financial markets had appeared to ignore the trade tensions through much of 2018, this was no longer the case.

The IMF noted that while the US and China had called a 90-day “truce” in their trade conflict, the outcome would depend on a difficult negotiation.

Mr Frydenberg’s speech today highlights the Coalition’s success in negotiating trade deals.

“When we came to government, Australia’s free-trade agreements covered around a quarter of our total two-way trade,’’ he says. “Today, it is 70 per cent and rising to 88 per cent when current negotiations are completed.”