Davos, Switzerland — The International Monetary Fund has cut its forecast for world economic growth this year, citing heightened trade tensions and rising U.S. interest rates.
The IMF said Monday that it expects global growth this year of 3.5 percent, down from 3.7 percent in 2018 and from the 3.7 percent it had forecast for 2019 back in October.
Unveiling its forecasts at the World Economic Forum in Davos, Switzerland, the fund left its prediction for U.S. growth this year unchanged at 2.5 percent.
"The U.S. expansion continues, but the forecast remains for a deceleration with the unwinding of fiscal stimulus," said economist Gina Gopinath, director of research at the IMF, in prepared remarks. The ongoing partial government shutdown poses "downside risks" for the global economy, she added.
But the IMF trimmed the growth outlook for the 19 countries that use the euro currency to 1.6 percent from 1.8 percent.
"In Europe the Brexit cliffhanger continues, and the costly spillovers between sovereign and financial risk in Italy remain a threat," Gopinath said.
The World Bank and the Organization for Economic Cooperation and Development have also downgraded their world growth forecasts.
China cooling fast
Growth in emerging-market countries is forecast to slow to 4.5 percent from 4.6 percent in 2018. The IMF expects the Chinese economy — the world's second biggest — to grow 6.2 percent this year, down from 6.6 percent in 2018. But the organization said a slowdown in China could be "faster than expected," potentially spooking financial markets.
China released data on Monday showing its economic growth fell last year to 6.6 percent, the. The Chinese economy is likely to face continued headwinds in 2019 before stabilizing in the second half of the year, according to economists with Societe Generale.
"We therefore believe growth of below 6.5 percent will become the norm from here, and that Beijing is almost certainly going to accept this new reality and lower the growth target for 2019 to 6-6.5 percent," they said in a research note.
Trade spats cast "shadow"
Rising trade tensions pose a major risk to the world economy. Under President Donald Trump, the U.S. has imposed import taxes on steel, aluminum and hundreds of Chinese products, drawing retaliation from China and other U.S. trading partners.
"While the December 1 announcement that tariff hikes have been put on hold for 90 days in the U.S.-China trade dispute is welcome, the possibility of tensions resurfacing in the spring casts a shadow over global economic prospects," the IMF said in its report.
Rising interest rates in the U.S. and elsewhere are also pinching emerging-market governments and companies that borrowed heavily when rates were ultra-low in the aftermath of the 2007-2009 Great Recession.
As the debts roll over, those borrowers have to refinance at higher rates. A rising dollar is also making things harder for emerging-market borrowers who took out loans denominated in the U.S. currency.