IMF Slashes US Growth Outlook, Blames Rates & Trade; Sees Venezuelan Inflation 10-Million-Percent

Confirming Director Lagarde's warning that "clouds on the horizon have materialized," The International Monetary Fund is downgrading its outlook for the world economy, citing rising interest rates and growing tensions over trade.

The IMF said Monday that the global economy will grow 3.7 percent this year, the same as in 2017 but down from the 3.9 percent it was forecasting for 2018 in July.

It slashed its outlook for the 19 countries that use the euro currency and for Central and Eastern Europe, Latin America, the Middle East and Sub-Saharan Africa.

Given the actual global data, The IMF and consensus have a long way to go...

Furthermore, The IMF expects the U.S. economy to grow 2.9 percent this year, the fastest pace since 2005 and unchanged from the July forecast.

But it predicts that U.S. growth will slow to 2.5 percent next year as the effect of recent tax cuts wears off and as President Donald Trump's trade war with China takes a toll.

As The IMF blog details, there are clouds on the horizon. Growth has proven to be less balanced than hoped. Not only have some downside risks that the last WEO identified been realized, the likelihood of further negative shocks to our growth forecast has risen. In several key economies, moreover, growth is being supported by policies that seem unsustainable over the long term. These concerns raise the urgency for policymakers to act.

Growth in the United States, buoyed by a procyclical fiscal package, continues at a robust pace and is driving US interest rates higher. But US growth will decline once parts of its fiscal stimulus go into reverse. Notwithstanding the present demand momentum, we have downgraded our 2019 US growth forecast owing to the recently enacted tariffs on a wide range of imports from China and China’s retaliation. China’s expected 2019 growth is also marked down. Domestic Chinese policies are likely to prevent an even larger growth decline than the one we project, but at the cost of prolonging internal financial imbalances.

Additionally, The IMF sees rising risks...

With their core inflation rates largely quiescent, advanced economies continue to enjoy easy financial conditions. This is not true in emerging and developing economies, where financial conditions have tightened markedly over the past six months, as the new Global Financial Stability Report explains in detail. The chart below indicates the preponderance of recent policy tightening actions across central banks represented in the Group of Twenty. For emerging market and developing economies, gradually tightening US monetary policy, coupled with trade uncertainties and—for countries such as Argentina, Brazil, South Africa, and Turkey—distinctive factors, have discouraged capital inflows, weakened currencies, depressed equity markets, and pressured interest rates and spreads. The high levels of corporate and sovereign debt built up over years of easy global financial conditions, which the latest Fiscal Monitor documents, constitute a potential fault line.

We do not see recent developments as part of a generalized investor pull-back from emerging and frontier markets, nor do we expect the current problem cases necessarily to spill over to countries with stronger fundamentals. Many emerging economies are managing relatively well—given the common tightening they face—using established monetary frameworks based on exchange rate flexibility. But there is no denying that the susceptibility to large global shocks has risen. Any sharp reversal for emerging markets would pose a significant threat to advanced economies, as emerging market and developing economies make up about 40 percent of world GDP at market exchange rates.

Other downside risks that now appear more prominent for the near term relate to further disruptions in trade policies. Two major regional trade arrangements are in flux—the United States-Mexico-Canada Agreement (which awaits legislative approval) and the European Union (with the latter negotiating the terms of Brexit). US tariffs on China, and more broadly on auto and auto part imports, may disrupt established supply chains, especially if met by retaliation.

Reflecting these developments, news-based indicators of policy uncertainty have spiked recently, even if advanced-country asset markets remain less concerned. The impacts of trade policy and uncertainty are becoming evident at the macroeconomic level, while anecdotal evidence accumulates on the resulting harm to companies. Trade policy reflects politics, and politics remain unsettled in several countries, posing further risks.

To gauge the severity of the threats to growth, one must ask how governments could respond if risks are realized and widespread recession ensues. The answer is not comforting. Mechanisms of multilateral global policy cooperation are under strain, notably in trade, and need strengthening. Governments have less fiscal and monetary ammunition than when the global financial crisis broke out ten years ago, and therefore need to build their fiscal buffers and enhance resilience in additional ways, including by upgrading financial regulatory regimes and enacting structural reforms that raise business and labor-market dynamism. Despite the possibility of less “political space” in some countries, making consensus on sound policies harder to reach, there will not be a better time than now for positive action.

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Additionally, Bloomberg reports that Venezuela’s annual inflation rate will surge to 1.37 million percent by the end of the year as the government fails to cover a widening budget shortfall by printing money, according to a report from the International Monetary Fund published Tuesday.

That estimate from the latest IMF World Economic Outlook is up from the forecast of 1 million percent the IMF made in July and more than a hundred times faster than its January estimate of 13,000 percent. Looking ahead, consumer prices will rise 10 million percent in 2019, according the report.

The Fund kept its economic forecast for Venezuela unchanged from July, maintaining its estimate that gross domestic product will shrink 18 percent in 2018 -- representing a third straight year of double-digit decline in GDP as oil output falls and political instability rises.

Bloomberg’s Cafe Con Leche Index, which tracks the price of a cup of coffee served at a bakery in eastern Caracas, estimates an annualized rate of inflation of almost 340,000 percent in just the past six months.