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IMF chief economist and director of the research department Gita Gopinath.

Esteban Felix/The Associated Press

The U.S.-China trade war will cut 2019 global growth to its slowest pace since the 2008-2009 financial crisis, the International Monetary Fund warned on Tuesday, but said output would rebound if their duelling tariffs were removed.

The IMF said its latest World Economic Outlook projections show 2019 GDP growth at 3 per cent, down from 3.2 per cent in a July forecast, largely owing to increasing fallout from global trade friction.

The forecasts set a gloomy backdrop for the IMF and World Bank annual meetings this week in Washington, the first for the Fund’s new managing director, Kristalina Georgieva. She is inheriting a range of problems, from stagnating trade to unrest in Ecuador and political backlash in Argentina over IMF-mandated austerity programs.

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Without a nearly simultaneous easing of monetary policy by major central banks, IMF chief economist Gita Gopinath said global growth would be half a percentage point lower in 2019 – at 2.5 per cent, teetering on the edge of widespread recession.

“The weakness in growth is driven by a sharp deterioration in manufacturing activity and global trade, with higher tariffs and prolonged trade policy uncertainty damaging investment and demand for capital goods,” Ms. Gopinath said.

The global crisis lender said that by 2020, announced tariffs would reduce global economic output by 0.8 per cent. That translates to a loss of about US$700-billion – the equivalent of making Switzerland’s economy disappear.

The growth downgrade assumes that all announced U.S. tariffs on Chinese goods are put in place, along with Chinese retaliation. These include a five-percentage-point U.S. duty increase on Chinese goods originally scheduled for Tuesday and 10-per-cent tariffs on US$156-billion in Chinese goods scheduled for Dec. 15.

If these incremental moves are scrapped completely by a U.S.-China trade deal, the global GDP loss would shrink to 0.6 per cent, Ms. Gopinath said. She added that all output would rebound by 0.8 per cent if all U.S. and Chinese tariffs were removed.

Services were still strong across much of the world, but there were some signs of softening in that sector in the United States and Europe, the IMF said.

For 2020, the Fund said global growth was set to pick up to 3.4 per cent owing to expectations of better performances in Brazil, Mexico, Russia, Saudi Arabia and Turkey. But this forecast was a 10th of a point lower than in July and was vulnerable to downside risks, including worse trade tensions, Brexit-related disruptions and an abrupt aversion to risk in financial markets.

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If Britain were to leave the European Union with no customs deal in place, it would cut Britain’s GDP output level by as much as 5 per cent in the next two years and 3 per cent in the longer term, Ms. Gopinath said.

INVESTMENT, TRADE STALL

The World Economic Outlook report spells out in sharp detail the economic difficulties caused by the U.S.-China tariffs, including direct costs, market turmoil, reduced investment and lower productivity owing to supply chain disruptions.

The IMF said foreign direct investment abroad by advanced economies came to “a virtual standstill” in 2018 after increasing in earlier years to average more than 3 per cent of global gross domestic product annually – or more than US$1.8-trillion.

The institution said the decline of some US$1.5-trillion between 2017 and 2018 reflected purely financial operations by large multinational corporations, including in response to changes in U.S. tax law.

Global vehicle purchases fell by 3 per cent in 2018, reflecting a drop in demand in China after expiration of tax incentives and production adjustments after adoption of new emissions standards in Germany and other euro zone countries.

Global trade growth reached just 1 per cent in the first half of 2019, the weakest level since 2012, weighed down by higher tariffs and prolonged uncertainty about trade policies, as well as a slump in the automobile industry.

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After expanding by 3.6 per cent in 2018, the IMF now projects global trade volume will increase just 1.1 per cent in 2019, 1.4 percentage points less than it forecast in July and 2.3 percentage points less than forecast in April.

Trade growth was expected to rebound to 3.2 per cent in 2020, however risks remained “skewed to the downside,” the IMF said, with a significant drag on both the U.S. and Chinese economies.

TARIFF, RESHORING LOSSES

New IMF projections show China’s GDP output falling 2 per cent in the near term under the current tariff scenario and 1 per cent in the long term, while U.S. output would decline 0.6 per cent over both time spans.

“To rejuvenate growth, policy-makers must undo the trade barriers put in place with durable agreements, rein in geopolitical tensions and reduce domestic policy uncertainty,” Ms. Gopinath said.

But she was cautious about U.S. President Donald Trump’s announcement on Friday about the first phase of a U.S. trade deal with China, saying that more details were needed about the “tentative” deal.

The IMF also modelled what would happen if multinational firms in the United States, euro zone and Japan reshored enough production to reduce nominal imports by 10 per cent. The lender found that it would drive up consumer prices and reduce domestic demand, while throttling the spread of technology to emerging economies.

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“At 3-per-cent growth, there is no room for policy mistakes and an urgent need for policy-makers to co-operatively de-escalate trade and geopolitical tensions,” it said. “Further escalation of trade tensions and associated increases in policy uncertainty could weaken growth relative to the baseline projection.”

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