Spikes in the US-China trade war could strip 0.9% off US GDP, and 1.6% in China, according to the IMF, which warns against “pervasive uncertainty about future trade costs”.

The IMF has slashed its growth forecasts for both the US (0.1%) and China (0.2%) for 2019. Globally, the ongoing tensions have led the fund to cut 0.2% from its earlier prediction of GDP growth. Now, the world economy will expand at 3.7% this year and next, according to the biannual World Economic Outlook, showcased in Bali today.

The Bretton Woods institution has warned that the trade war, the shift to populism in Brazil, currency crises in Argentina and Turkey, and the unpredictable and seemingly ailing Brexit negotiations between the EU and UK are adding to adverse conditions for the global economy.

Should these conditions maintain or worsen, it will dent business and financial market sentiment, trigger financial market volatility and slow investment in trade.

“An increase in trade barriers would disrupt global supply chains, which have become an integral part of production processes in the past decades, and slow the spread of new technologies, ultimately lowering global productivity and welfare. It would also make tradable consumer goods less affordable, harming low-income households disproportionately. In addition to their negative effects on domestic and global growth, protectionist policies would likely have very limited effect on external imbalances,” the report reads.

In a globally broadcast press conference to accompany the hotly-anticipated report, the IMF’s outgoing chief economist Maurice Obstfeld warned that China’s economy would have lost 0.7% in economic growth had it not been for stabilisation measures taken by the People’s Bank of China (PBOC).

Chief among these was a significant cut in the cash reserves Chinese banks must hold, issued on October 7 and effective from October 15. This is designed to lower the cost of financing and loosen the purse strings of lenders in the country, amid fears that small businesses are bearing the cost of the trade war, thus far.

The reserve requirement ratio (RRR) will have 100 basis points cut from its current level of 15.5% for large banks and 13.5% for smaller ones, the second such move this year. This is set to inject about Rmb750bn (US$109.2bn) of liquidity into China’s banking system.

Nevertheless, the IMF called on China to continue with its overarching policy of deleveraging, which it claims would leave it in a better position to weather any economic storms stemming from the current disruption.

“Building on recent efforts, China should continue to rein in credit growth and address financial risks, even if growth temporarily slows,” the report reads, with Obstfeld adding afterwards that the government in Beijing “needs to think about the quality of growth, not the quantity”.

The report warns that despite rises of late, commodity prices will remain below their pre-2011 levels, with commodity exporters facing a difficult adjustment to structurally lower revenues. This could add to instability in commodity-dependent countries such as Brazil, which is in the midst of political upheaval, and Indonesia, which goes to the presidential polls next year.

Tensions, meanwhile, continue to rise between the world’s two largest economies, with little sign of dissipating. A speech to a Washington DC-based think tank last week by US vice-president Mike Pence was noted for its remarkably strong anti-China rhetoric and was described by one Chinese observer as “the declaration of a new Cold War”.

In the speech, Pence said that “while Beijing still pays lip service to ‘reform and opening’, Deng Xiaoping’s famous policy now rings hollow”.

He took aim at Made in China 2025, the government’s grand plan to upgrade Chinese industry, accusing Beijing of directing “its bureaucrats and businesses to obtain American intellectual property – the foundation of our economic leadership – by any means necessary”.

Pence also lashed out at China’s perceived “debt diplomacy”, closely associated with its flagship Belt and Road Initiative, where “those loans are opaque at best”.

He added: “Just ask Sri Lanka, which took on massive debt to let Chinese state companies build a port of questionable commercial value. Two years ago, that country could no longer afford its payments, so Beijing pressured Sri Lanka to deliver the new port directly into Chinese hands. It may soon become a forward military base for China’s growing blue-water navy.”

The Chinese government dismissed all of Pence’s allegations, but this unusually public mud-slinging has brought tensions to an unprecedented high: it now seems unlikely that there will be any way back from this.