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IMF lowers forecast for global economic growth again

The seal of the International Monetary Fund (IMF) is located on April 8, 2019 in front of the headquarters in Washington, DC.

Almond Ngan | AFP | Getty Images

The International Monetary Fund has once again cut its forecast for global economic growth as the US-China trade war continues, Brexit continues to cause concern and inflation remains subdued.

The global economy is expected to expand by 3.2% in 201

9. The fund said in a report released Tuesday morning. The revised economic growth is 0.1 percentage points below the IMF forecast in April and 0.3 percentage points below the fund's growth estimate at the beginning of the year.

"The risks to the forecast are mainly downside," the IMF said. "These include further trade and technology tensions that weigh on sentiment and slow down investment, a sustained increase in risk aversion that exposes the financial vulnerabilities that continue to accumulate after years of low interest rates."

"The fund added that monetary policy leeway is limited to counteracting downturns and delaying negative shocks for longer than usual".

Back in May, China and the US raised tariffs on goods worth billions of US dollars, fueling fears of another protracted trade war between the world's largest economies. The trade war between the US and China began last year, when the US imposed taxes on Chinese imports and China retaliated with its own tariffs.

This conflict has dampened expectations of economic growth and corporate earnings. Some companies are also relocating their supply chains from China to avoid tariffs.

The IMF points out that global trade volume declined in the first quarter of 2019 to around 0.5% year-on-year.

"Weak trade prospects, which to some extent reflect trade tensions, are again providing headwinds for investment," the IMF said. "The silver lining remains the performance of the service sector, where sentiment was relatively stable, supporting employment growth (which in turn boosted consumer confidence)."

Another factor dampening global growth prospects is uncertainty In April, the EU and the UK agreed to extend the Brexit deadline to 31 October. However, it is not clear whether the two parties will reach an agreement to maintain some economic relations the deadline or whether it is completely severed.

"The forecast is for a gradual Brexit followed by a gradual transition to the new regime, but from mid-July the final form of Brexit remained highly uncertain," the fund said.

In addition, inflationary pressures in the developed economies of Europe and Japan remain low, as is the US. This has led the big central banks to maintain the historically low interest rates or to further loosen their monetary policy stance.

The Federal Reserve in the US is widely expected to lower interest rates by at least 25 basis points at the end of July. The President of the European Central Bank, Mario Draghi, also opened the way for further monetary stimulus last month if the economic situation does not improve.

"Lower inflation rates and deeper inflation expectations compound debt servicing problems for borrowers, put pressure on corporate investment spending and limit the monetary policy leverage central banks have to counterbalances downturns, which means that growth will be consistently lower given a given negative shock could, "said the IMF.

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