The International Monetary Fund (IMF) has cut global growth forecasts this year and next, with potential impact on credit, bank lending, and the value of investments.
The IMF cut 0.1 percentage point off its estimate for 2019 growth, and 0.1 percentage point off its forecast for growth this year. The institution also downgraded its estimate for 2021 by 0.2 percentage point.
Following the revisions, expected global growth now are: 2.9% for 2019; 3.3% for 2020; and 3.4% for 2021.
Already, in its previous update in October 2019, the IMF projected world GDP growth to be 3% in 2019—the slowest rate since the financial crisis—and growth for 2020 at 3.4%.
“A synchronised slowdown”
The estimates in October were also a downgrade on earlier growth forecasts. The fund called the widespread slacking “a synchronised slowdown”.
A significant component of the decline is a substantial revision to growth in India for both for 2019 and 2020.
A slump is also expected in other economies around the globe. These include Brazil, Mexico, Saudi Arabia, and South Africa.
In addition, much uncertainty still hangs over the world economy. Not least among them, trade tensions not only between the US and China (which remain unsettled, despite some positive news), but also potentially between the US and the European Union as well. There’s also the risk of trade tensions spreading to other regions.
Political risks also remain, as we continue to see widespread social unrests in a number of countries.
One hopeful sign is that the US economy remains resilient, with a healthy growth rate, record low unemployment, and robust consumption spending. However, the IMF and others are projecting the US economy will slow down from 2.3% in 2019 to 2% in 2020.
The effect of Mr. Trump’s fiscal stimulus, which has sustained growth in the midst of global uncertainty, is expected to fade in the next year or two.
The banking sector in case of a severe downturn
According to a new survey released by PwC, CEOs are growing increasingly pessimistic, with 53% anticipating a decline in economic growth in 2020. The firm released its 23rd annual survey at the World Economic Forum in Davos, Switzerland, interviewing 1,600 CEOs across 83 countries.
No one is talking about a recession yet. But if there’s a more severe slowdown (triggered by, say, soaring oil prices amid Middle East tensions, or trade tensions getting out of hand), banks’ earnings could be severely damaged.
The sector could be negatively impacted via credit losses, declines in the value of other investments, reductions in new business revenues, and so on.
If things get worse, banks could be required to hold much more capital, and of better average quality, than before. Similarly, new liquidity requirements could force banks to hold more liquid assets and to cut back on their reliance on shorter-term funding.
“Given the lingering uncertainty over trade tensions, geopolitical issues and the lack of agreement on how to deal with climate change, the drop in confidence in economic growth is not surprising — even if the scale of the change in mood is,” said Bob Moritz, PwC Networks’ chairman.