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IMF warns trade wars could hurt global economic growth

The threat of trade wars is spoiling an otherwise broad and strong global economic upswing, warns the International Monetary Fund's latest economic update.

The IMF's World Economic Outlook report, published Tuesday, said the global economic upswing that began around mid-2016 has become broader and stronger, with projections largely revised upward compared to those from six months ago.

However, the IMF also warned that the prospect of trade restrictions might undermine confidence and growth.

"The world economy continues to show broad-based momentum," said Maurice Obstfeld, economic counselor and director of research at the IMF, at a news conference about the update. "Against that positive backdrop, the prospect of a similarly broad-based conflict over trade presents a jarring picture."

The IMF upgraded its projection for global growth to 3.9% for both 2018 and 2019 in its latest April World Economic Outlook, up 0.2 percentage points also for both years vs. forecasts made in its October 2017 update.

Advanced economies are set to grow 2.5% in 2018 and 2.2% in 2019, up 0.5 and 0.4 percentage points, respectively, vs. October's update; while emerging markets and developing economies combined are expected to grow 4.9% in 2018 — the same projection as in October, and 5.1% in 2019, up 0.1 percentage points.

The upgrade to global growth reflects "continuing strong performance in the euro area, in Japan and China, and in the United States," Mr. Obstfeld said.

Eurozone growth is projected at 2.4% for 2018, up 0.5 percentage points, and 2% in 2019, up 0.3 percentage points. Growth in Japan in 2018 is forecast at 1.2%, up 0.5 percentage points vs. October's update; and 0.9% in 2019, up 0.1 percentage points. China is expected to grow 6.6% in 2018 and 6.4% in 2019, both up 0.1 percentage points vs. October's projections.

U.S. growth was revised upward 0.6 percentage points for 2018, to 2.9%, and 0.8 percentage points to 2.7% for 2019.

"U.S. growth will be boosted in part by a largely temporary fiscal stimulus which explains over one-third of our upgrade over last October for 2018 global growth," Mr. Obstfeld said.

U.K. 2018 projected growth was revised upward by 0.1 percentage points to 1.6%, but the 2019 projection was revised downward by 0.1 percentage points to 1.5%.

"Now this is all very good near-term news, but beyond this longer-term prospects are more sobering. Advanced economies facing aging populations, falling rates of labor force participation and low productivity growth, will likely not regain soon the per capita growth rates they enjoyed before the global financial crisis," Mr. Obstfeld said.

Outlining risks to growth, Mr. Obstfeld said private and public debt levels are "historically high." He said the IMF's new global financial stability report, to be published Wednesday, "shows that global financial conditions remain generally loose despite the approach of higher monetary policy interest rates. This enables a further buildup of asset market vulnerabilities."

He said geopolitical risk should not be discounted and reiterated that "escalating tensions over trade present a growing risk."

Mr. Obstfeld said the IMF has for some time called for policymakers to take the "ideal opportunity" presented by the current cyclical upswing to make longer-term growth "stronger, more resilient and more inclusive. The present good times will not last for long, but sound policies can extend the current upswing while reducing the risks of a disruptive unwinding. Countries need to rebuild fiscal buffers, to enact structural reforms, and steer monetary policy cautiously in an environment that is already complex and challenging," he said.

Mr. Obstfeld added: "Instead the prospect of trade restrictions and counter-restrictions threatens to undermine confidence and derail growth prematurely. While some governments are indeed pursuing substantial economic reforms, trade disputes risk diverting others from the constructive steps they would need to take now to improve and secure growth prospects. That major economies are flirting with trade war at a time of widespread economic expansion may seem paradoxical, especially when the expansion is so reliant on investment and trade."