World economy to rebound as US-China trade tensions cool: IMF

The world economy will grow by 3.3 percent in 2020, the IMF says

The global economy is set to snap back from its weakest year since the financial crisis as trade tensions between the U.S. and China have cooled and central banks around the world eased policy.

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Global gross domestic product will grow by 3.3 percent in 2020, the International Monetary Fund said in its updated World Economic Outlook released Monday. The world economy grew at an estimated 2.9 percent pace in 2019.

"Market sentiment has been boosted by tentative signs that manufacturing activity and global trade are bottoming out, a broad-based shift toward accommodative monetary policy, intermittent favorable news on US-China trade negotiations, and diminished fears of a no-deal Brexit, leading to some retreat from the risk off environment that had set in at the time of the October WEO," the IMF said in its report.

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Despite its positive outlook, the IMF lowered both its 2020 growth forecast by 0.1 percentage points and its 2021 outlook by 0.2 percentage points. The IMF sees global growth of 3.4 percent next year.

Shipping containers being loaded onto Xin Da Yang Zhou ship from Shanghai, China .

Earlier this month, President Trump and Chinese Vice Premier Liu He signed a phase one trade deal that de-escalated the nearly two-year-long trade war. The cooling of trade tensions is expected to serve as a tailwind for global trade growth, which the IMF says appears to be "bottoming out."

The IMF sees global trade growing 2.9 percent in 2020 and 3.7 percent in 2021. Trade frictions between the world's two largest economies caused global trade to slow to an estimated 1 percent growth last year.

But the trade truce is only part of the story.

Central banks were aggressively easing policy in 2019, cutting rates 131 times, according to cbrates.com. That's in addition to the Federal Reserve resuming the expansion of its balance sheet late last year.

"The early signs of stabilization reinforced financial market sentiment already shored up by central bank rate cuts," the IMF said.

The Davos Congress Centre, center, is prepared for the World Economic Forum in Davos, Switzerland, Sunday. (AP Photo/Markus Schreiber)

Still, the IMF expects the U.S. economy to slow over the next few years. GDP growth will slow from an estimated 2.3 in 2019 to 2 percent this year and 1.7 percent in 2021 amid a "return to a neutral fiscal stance and anticipated waning support from further loosening of financial conditions," the IMF said.

As for China, an aging population and rising debt levels will cause gross domestic product growth to slow from an estimated 6.1 percent last year to 6 percent in 2020 and 5.8 percent in 2021, the IMF said.

With the world's two largest economies slowing, the IMF says that slack will be picked up by strength in Europe and emerging markets.

The IMF warns that downside risks "remain prominent" with rising geopolitical tensions between the U.S. and Iran, intensifying social unrest, further trade friction and economic discord all acting as headwinds.

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"A materialization of these risks could lead to rapidly deteriorating sentiment, causing global growth to fall below the projected baseline," the IMF said.