The Daily Update - Beware the Clouds on the Horizon!!

In one of his last interviews before he retires from the International Monetary Fund (IMF), its chief economist has warned that the US may start to feel the effects of a sharp slowdown over the next couple of years, although he does not believe that it will result in a recession. Dr Maurice Obstfeld, speaking to the Financial Times and The Wall Street Journal said ‘We've long been predicting somewhat lower US growth for 2019 than what we are seeing this year’ adding the slowdown ‘is going to be sharper probably in 2020 than in 2019, according to the data we are seeing’. The warning comes after the IMF had already downgraded its prediction for US growth form 2.8% this year to 2.5% in 2019.

Dr Obstfeld believes that the main headwinds the US will face over the coming quarters will be from the European and Asian economies, with data that disappointed in the third quarter of this year, which will eventually start to drag on the US. As Obstfeld puts it ‘For the rest of the world there seems to be some air coming out of the balloon and that, I think, will come back and also affect the U.S’.

Another area that the chief economist spoke about was the high probability that China would overtake the US as the world’s biggest economy in just a few short years. The IMF estimates that China was 62% the size of the US economy last year, however, it will have grown to 79% in the next 5 years. ‘As a matter of algebra, if China keeps growing at close to its current rate and the U.S. keeps growing close to its current rate, we can figure out how many years it will take for China to reach the size of the U.S’ he said. He did give a stark warning that both countries have a responsibility to ‘manage’ China’s growth.  ‘It’s really important that this not play out in a conflictual way, because that will be destabilizing for the entire global economy’ he said, adding ‘It’s going to be important to try to entice China into the global framework that countries agree on, in which China changes some of its trading practices and there’s also accommodation to some of its legitimate economic goals’.

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