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The International Monetary Fund has trimmed its global economic growth forecasts for the next two years, but the agency said easing trade tensions and widespread interest-rate cuts have reduced the risks of a deeper slump.

In its World Economic Outlook Update issued Monday, the IMF projected that the global economy will expand by 3.3 per cent in 2020 and 3.4 per cent in 2021. That’s down 0.1 and 0.2 percentage points, respectively, from the international financial institution’s previous quarterly projections in October. The IMF blamed surprising weakness in India and some other emerging economies for the downgrade.

Nevertheless, the projections represent a modest recovery from a weak 2019, a year dogged by trade and geopolitical uncertainty that slowed investment, trade flows and manufacturing demand. The IMF estimated that the global economy expanded by just 2.9 per cent last year, the slowest growth since the 2009 recession.

The agency said the sense of gloom that hung over the global economy for much of 2019 has subsided somewhat.

“While the baseline growth projection is weaker, developments since the fall of 2019 point to a set of risks to global activity that is less tilted to the downside,” the agency wrote in its report.

“Market sentiment has been boosted by tentative signs that manufacturing activity and global trade are bottoming out, a broad-based shift toward accommodative monetary policy, intermittent favourable news on US-China trade negotiations, and diminished fears of a no-deal Brexit,” it said.

Still, the report cautioned that risks to the global economy “remain prominent,” including ongoing trade protectionism and rising geopolitical tensions, most notably the recent hostilities between the U.S. and Iran.

“The reality is that global growth remains sluggish,” said IMF managing director Kristalina Georgieva in a news conference in Davos, Switzerland, where world political, business and economic leaders gather this week for the World Economic Forum’s annual summit.

“Above all, we are all adjusting to live with the new normal of higher uncertainty,” Ms. Georgieva said. “Yes, we have good news with the signing of the Phase One trade agreement between the U.S. and China. But the underlying causes for trade tensions, and the fundamental issues of reform of the trade system, are still with us.”

The IMF left its growth forecasts for Canada unchanged, at 1.8 per cent for each of 2020 and 2021. The agency estimated that Canada’s economy grew 1.5 per cent in 2019, in line with the Bank of Canada’s most recent forecast, issued in October. (Canada’s central bank will issue new projections this Wednesday.)

The agency projected that U.S. growth would slow to 2 per cent in 2020 and 1.7 per cent in 2021, from an estimated 2.3 per cent in 2019, as the impact of 2018’s tax cuts continues to fade.

It forecast that growth in China would slow to 6 per cent this year and 5.8 per cent next year, from 6.1 per cent in 2019. The agency projected that euro-area growth would pick up slightly, to 1.3 per cent in 2020 and 1.4 per cent in 2021, from 1.2 per cent last year.

The IMF also urged advanced economies to lean more on government spending, and less on already-low interest rates, to stimulate growth. The sentiment echoes similar recent comments by Canadian Finance Minister Bill Morneau and senior Bank of Canada officials.

“With policy rates in many advanced economies close to the effective lower bound and long-term interest rates at low (in some cases, negative) levels, the room for monetary policy to combat further growth declines is limited. Countries with fiscal space, and where fiscal policy is not already excessively expansionary, can rely more on fiscal stimulus to support demand if the need arises,” the report said.

“Considering the modest growth potential across the group, countries with fiscal space should increase spending on initiatives that raise productivity growth, including research, training, and physical infrastructure,” it said.

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