As global recession fears grow, IMF, others, escalate calls to end U.S. shutdown and trade war

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DAVOS, Switzerland – Calls are growing louder for President Donald Trump to end the trade war and government shutdown as fresh evidence pours in that businesses and consumers are losing faith in the global expansion.

On Monday, the International Monetary Fund cut its global growth predictions for this year and next, saying “the balance of risks remains skewed to the downside” and momentum has “past its peak.”

Chief executives ranked a global recession as their number one concern for 2019, according to a survey of nearly 800 top business leaders around the world released Thursday by The Conference Board. Global trade threats came in second. Even consumers, who power the U.S. economy, are on edge. Consumer confidence has fallen to the lowest level of Trump’s presidency, according to the University of Michigan Consumer Sentiment survey out Friday.

“After two years of solid expansion, the world economy is growing more slowly than expected and risks are rising,” said Christine Lagarde, managing director of the IMF. “Does that mean a global recession is around the corner? No. But the risk of a sharper decline in global growth has certainly increased.”

The mood is noticeably more somber as government, business and non-profit leaders from around the world are gathering this week here in Davos, Switzerland, for the annual World Economic Forum. A year ago, optimism was high as nearly every country was growing, and Trump received a warm welcome from business leaders after a big U.S. tax cut for corporations.

Today growth is decelerating, especially in China and Germany, Trump’s tariffs are starting to bite and the U.S. government is in the midst of the longest ever shutdown, which is starting to have a serious impact on the economy. Trump was supposed to speak in Davos this year but his entire delegation is staying home because of the shutdown.

“I think there is anxiety. There are concerns the slowdown could be quite deep,” said John Hagel, co-chairman of Deloitte’s Center for the Edge. “The more we can show some progress and resolution of some trade disputes, that would help.”

The IMF is the latest institution to scale back its growth forecasts, following downward revisions by the Federal Reserve and many investment banks. The IMF now predicts 3.5 percent growth in 2019 and 3.6 percent in 2020, slightly down from 3.7 percent forecasts for both years that it put out this fall.

As the economy slows, it’s easier for it to be knocked off track, many economists say. The IMF urged world leaders, especially Trump and Chinese President Xi Jinping, to de-escalate trade tensions to alleviate that major uncertainty weighing on growth.

“It’s absolutely crucial for us to turn around the momentum, and policy can really help,” said Gita Gopinath, the new head of research at the IMF. “On the trade side, it’s important to come together, to have a cooperative solution that’s permanent and that would be good not just for the U.S. and China, but for the global economy.”

Most forecasters predict a cooling economy in the United States, China and many other parts of the world this year, but they don’t see an outright recession, which is defined as six months of negative growth. Still, an uneasiness exists about whether the slowdown will be modest or severe.

Trump isn’t the only world leader noticeably absent from Davos this year. French President Emmanuel Macron and British Prime Minister Theresa May are also staying home as they deal with crises, a reminder of how tenuous geopolitics are in many parts of the world. The IMF made its biggest cuts to growth for Germany, France, Russia and Mexico, citing trade tensions and new government policies such as Germany’s stricter auto exhaust regulations as headwinds for growth.

The U.S. was supposed to be a bedrock of the global economy this year as hiring and confidence remained strong heading into the year, but the shutdown is starting to shake sentiment.

The IMF warned that a “protracted” government shutdown would be a sharp drag on U.S. growth. The Federal Reserve and many others have made similar warnings. What’s concerning for many executives about the shutdown is that Trump appears unwilling to make necessary compromises.

“If you want to be a superpower in the world – and the U.S. still is – you have to engage with people,” said Hans-Paul Bürkner, chair of the Boston Consulting Group. He warned that “everybody will be a bit more careful” until the shutdown and trade disputes are resolved.

The IMF forecasts the United States will grow at 2.5 percent this year and 1.8 percent next year. These predictions are unchanged from what the IMF said in October, but they represent a noticeably decline from about 3 percent growth last year.

Consumer spending drives the bulk of U.S. growth, but the shutdown, stock market turmoil and trade are beginning to weigh on people’s perceptions of the economy. The sharp fall in the University of Michigan’s consumer sentiment index has nearly erased the big gains seen after Trump’s election in 2016.

Executives are counting on U.S. consumers to keep spending, but they also worry that Trump’s tariffs will force them to raise prices and give American families another reason to scale back on expenditures.

Uncertainty is wearing on business leaders. Trump has put tariffs on 12 percent of all U.S. imports and has threatened to put taxes on all Chinese imports, a major escalation that is hanging out there even as the U.S. and China resume trade talks.

“If there’s a threat of doubling or tripling tariffs or another country getting slapped with tariffs, that kind of uncertainty in the macroeconomy really paralyzes executives,” said Greg Portell, global lead partner at A.T. Kearney. “There’s no way they can position their companies in that kind of uncertain environment.

Few at Davos were willing to openly say they fear a recession and they are encouraged by the rebound in the markets, but many acknowledge that there’s a problem where people could talk themselves into a recession by scaling back spending even before there’s a deep downturn.

“When you’re growing at 3 percent, you need a big shock to hurt the economy. When you’re down to 1.5 to 2 percent growth, all it takes is a little shock,” said Nariman Behravesh, chief economist at IHS Markit.