IMF’s crystal ball shows potential trouble for Trump in 2020

As a regular rite of spring, the International Monetary Fund (IMF) gazes into its crystal ball and predicts the fate of the global economy for the years that follow. This year, its economists saw dark clouds gathering.

They did not predict disaster but did talk of a notable slowing of global economic growth, both in absolute terms and compared to their assessments of three and six months ago.

{mosads}The world as a whole is expected to see economic growth drop from 3.6 percent in 2018 to 3.3 percent this year, before rebounding in 2020. That marks two downward revisions in a row for 2019 GDP growth.

The anticipated rebound in 2020 is only forecast for the developing world — countries like India and those in Latin America. In advanced economies such as the United States, EU and Japan, the slowdown is expected to continue, with growth dropping from 2.9 percent in 2018 to 1.8 percent in 2019 and 1.7 percent in 2020.

For the Trump administration, eyeing the election cycle, this is not good news. President Trump not only predicted a long period of rapid economic growth as a consequence of his signature 2017 tax package, but he has relied upon that growth to limit future budget deficits in coming years. A revved-up U.S. economy has been a central part of “making America great again.”

The IMF report does credit Trump administration policies with helping boost 2018 growth, largely as the result of fiscal stimulus — the boost to demand that can come with expanded deficit spending. A boost to fiscal deficits was a key feature of the 2017 tax bill, as tax cuts were not offset by increased revenue from other sources nor by reduced spending.

Yet the IMF implicitly takes issue with the argument that the U.S. tax cuts would provide any long-term boost to U.S. economic growth. Instead, it describes a temporary cyclical spurt that is now easing off, as the U.S. economy returns to its lower, long-term rate of growth. That is unwelcome news for an administration hoping to ride strong economic performance into an election campaign.

In addition, the IMF explicitly describes the costs of President Trump’s protectionist trade policies. An increase in trade tensions and tariff hikes, particularly between the United States and China, led its list of explanations for softening economic activity.

Beyond prudent economic management, its report said that “the main priority is for countries to resolve trade disagreements cooperatively, without raising distortionary barriers that would further destabilize a slowing global economy.”

Problematic U.S. policies were hardly the only culprit in slowing economic growth:

• German growth was slowed by new fuel emission standards for its autos;
• France was slowed by its “gilets jaunes” protests;
• Italy is struggling with debt concerns that have started to scare markets; and
• the U.K., of course, is grappling with the consequences of its uncertain Brexit plans.

A common theme was the growing concern of businesses, which could pull back on investment in the face of these costs and uncertainties.

The concerns were not limited to advanced economies. China’s economic growth is also expected to slow, though its forecast was very slightly upgraded from a few months ago. This lends little credence to Trump administration stories about tariffs bringing the Chinese economy to its knees.

While the IMF notes that tariffs are having a negative effect on the Chinese economy, it was equally concerned with Chinese debt measures and a slowdown in car buying and other consumer durable spending. Even with these concerns, Chinese growth was forecast to remain above 6 percent through 2020. 

If this assessment sounds dour but not dire, the IMF report warns that it sees greater risks of things getting worse than getting better. Financial markets have already priced in reasonably optimistic expectations of a U.S.-China trade resolution, for example.

The IMF forecast also assumes that the U.K. will not crash out of the EU unceremoniously. Failed trade negotiations or an abrupt Brexit could slow growth even further.

The IMF’s crystal ball-gazing is meant to coincided with a gathering of global economic finance ministers and potentates in Washington this past weekend.

IMF Managing Director Christine Lagarde summarized the situation by saying the world economy faces a “delicate moment.” On the policy front, it is one the Trump administration is often handling indelicately.

Philip I. Levy is an adjunct professor of strategy at the Kellogg School of Management at Northwestern University and a senior fellow on the global economy at The Chicago Council on Global Affairs.