Falling Investments, Rising Trade Barriers Bring Down Global Growth
BUSINESS ECONOMICS|December 1-15, 2019
The global economy is slowing down. Will it fall further?
Tushar K Mahanti

The International Monetary Fund’s (IMF) new Managing Director, Kristalina Georgieva, warned that the slowdown is posing a “serious risk”. The IMF has downgraded the global GDP growth to 3% for 2019 - the slowest since the global financial crisis of 2008.

World GDP growth slowing down

The IMF’s latest World Economic Report (October 2019) suggests that this subdued growth is the result of rising trade barriers, elevated uncertainty around trade and geopolitics, and idiosyncratic factors causing macroeconomic strain in several emerging market economies. Structural factors, such as low productivity growth, and aging demographics in advanced economies are also affecting macroeconomic stability.

Global GDP growth is projected to pick up to 3.4% in 2020, based primarily on projected improvement in economic performance in emerging markets in Latin America, West Asia, and emerging and developing Europe that are under macroeconomic strain. Alongside this, a projected slowdown in China and in the United States, portends further slowdown in 2020, the IMF cautioned.

The World Bank has appeared even more pessimistic and has downsized the global growth to 2.6% for 2019 - 0.3 percentage point below its previous forecast, reflecting weaker-than-expected international trade and investment. Growth is projected to gradually rise to 2.8% by 2021 with prospects for improved global financing conditions, as well as a modest recovery in emerging market and developing economies.

President Donald Trump’s trade actions will undermine global growth. In his latest threat, the US President announced plans to impose tariffs on Mexican imports if it doesn’t halt a flow of migrants reaching the US border. “Heightened policy uncertainty, including a recent re-escalation of trade tensions between major economies, has been accompanied by a deceleration in global investment and a decline in confidence,” stated the World Bank.

According to UNCTAD’s World Investment Report 2019, global flows of Foreign Direct Investment (FDI) fell by 13% to reach $1.3 trillion last year. This was the lowest since the global financial crisis.

FDI flows to developed economies reached the lowest point since 2004 – down by 27% last year. Inflows to Europe halved to less than $200 billion, due to negative inflows in a few large host countries as a result of funds repatriations and to a sizeable drop in the United Kingdom. Inflows in the United States also declined by 9% to $252 billion.

The trend has continued in the current year as well. According to the OECD, the global FDI flows declined by 20% in the first half of 2019 compared with the second half of 2018. The slowing down of investment and subdued activity, particularly in manufacturing and trade, has led the World Bank to lower further the 2019 global GDP growth projection to 2.4% (World Bank Monthly Report, October 2019).

America’s GDP growth will slow down to 2.2% in 2019 from 3% in 2018. It will be 2% in 2020 and 1.9% in 2021. This is as per the Federal Open Market Committee last September. The projected slowdown in 2019 and beyond is a side effect of the trade war, a key component of Trump’s economic policies.

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