IMF projects global growth at 2.9%; Disinflation to bring little comfort

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on Jan 31, 2023
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  • The IMF's new projections saw economic growth rising compared to the October 2022 report.
  • Countries will continue to experience falling rates of inflation.
  • Several threats exist that could upset a return to sound economic growth.

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The International Monetary Fund’s latest projections have revised global growth prospects down to 2.9% YoY for 2023, from 3.4% in 2022.

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However, the latest estimate follows an improvement from 2.7% in the October forecast for 2023.

In 2024, global growth is expected to edge up to 3.1%.

Source: IMF

Although the projected rate of growth is below historical trends, the improvement from the most recent data comes in response to better-than-anticipated US GDP numbers, reports of firm labour markets, the eventual re-opening of the Chinese economy and resilience in European energy markets owing to relatively warm weather.

In advanced economies, growth predictions shifted downwards by 0.1% to 1.2% in 2023, from the previous report.

For 2024, the annual forecast of 1.4% was higher than the October report of 1.2%.

Among emerging markets, growth in 2022 was estimated at 3.9%, while this is expected to rise to 4.0% and 4.2% over the next two years.

Source: IMF

In the case of the United States, given the rapid pace of monetary tightening, lower labour participation rate, and the rising dependency ratio, the IMF projects growth to weaken over the next couple of years, falling to 1.4% in 2023, and further to 1% in 2024.

The United Kingdom has seen an adverse reversal in fortunes, with the projection for 2023 falling from an expansion of 0.9% in October 2022, to a contraction of -0.6%.

The sharp fall is due to a flurry of rate hikes from the Bank of England, suppressed household budgets, the surge in energy prices and growing discontent among unionized workers.

Over in China, its GDP fell far short of the 2022 target, a sign of paralysis in the economy due to the strict health restrictions.

However, with the reopening of the country’s borders after the rollback of the harsh zero-covid policy, there is optimism that growth may begin to recover.

The Fund has forecast 2023 growth for China at 5.2%, up from 3% in 2022, and predicts a levelling off at 4.5% in 2024.

There are risks to this picture, which readers can explore in a piece on China’s PMI data released earlier today.

The Euro Area’s economic performance has positively surprised market watchers, with the IMF revising growth prospects upwards by 0.2% for 2023 to 0.7%.

This was despite the Ukraine-Russia conflict and compromised energy supplies.

Tejvan Pettinger, an economic educator notes that Russia’s loosening grip on European oil and gas markets is a result of higher efficiencies in Europe, the fall in energy consumption, the import of LNG and a surge in global supplies.

Indian forecasts place it at the top of the list, with the IMF estimating growth of 6.1% in 2023, rising to 6.8% in 2024.

Falling inflation

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Central to the expectation that global business activity and household consumption may be lifted is the moderation in sky-high levels of inflation.

Much of the decline is a result of globally lower commodities prices that were at acutely high levels at the peak of the Russia-Ukraine war, following the inflation that came from the pandemic-era stimulus.

The international body has estimated that 84% of member countries will see a moderation in headline inflation during 2023.

Yet, the inflation forecast for 2023 stands elevated at 6.6% and is expected to ease to 4.3% in 2024. This is still a significant step down from 2022 levels of 8.8%.

In advanced economies, inflation is expected to ease to 4.6% in 2023 versus 7.3% in 2022.

Moreover, in the US, M2 growth has incredibly been stalling, which should help to curtail rising costs. An article on the subject can be found in Invezz.

Danielle DiMartino Booth, a well-known economist and former Fed insider noted that disinflationary forces are picking up amid falling producer prices, and that,

…the housing market has corrected faster than any fed tightening cycle in history.

Emerging market economies are forecast to see inflation decline from 9.9% in 2022 to 8.1% in 2023.

Disinflation, not deflation

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Although the disinflation may be welcome, higher prices have already been baked in.

As a result, household budgets may not experience much relief despite falling inflation, and the cost of living will stay elevated for an extended period until workers can recover real wages.

Source: US FRED

The above graph notes the fall in inflation and the rising price level.

The IMF expects that disinflation to pre-pandemic levels in most countries will only occur sometime post-2024.

Threats to outlook

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The key source of tension for the global economy will be due to further monetary tightening, and a regime of elevated rates.

These will continue to weigh on business activity amid concerns that economies may be pushed into recessionary territory.

Moreover, higher interest rates mean that it is harder for households and indebted countries to make interest payments and reliably service debt.

At the same time, financial market participants are eager for a Fed pivot, which could boost equity valuations, but may also lead to renewed inflationary concerns.

In an earlier piece, we also discussed why labour markets in the US in particular may not be as robust as often thought, potentially necessitating a pivot. Interested readers can access this study here.

Another factor that could derail economic growth in 2023 is the ongoing conflict between Ukraine and Russia.

This remains a major concern for markets, and could once again disrupt supply chains and contribute to mounting inflationary pressures.

Source: IMF; As of 26th January 2023

Lastly, with China’s recent re-opening, there are also concerns that economic activity in the region could stall once more, given reports of a fresh wave of covid cases.

For investors, exercising defensive caution towards their portfolios in such a disinflationary environment may be advisable.

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