THE IMF FORECAST: A ROLLERCOASTER FOR THE ECONOMY AND THE MARKETS?
Last week the International Monetary Fund (IMF) published its global growth forecast. GDP this year remained at 3.2%, this is 6% down when compared to 2021. For 2023 the IMF has set the growth forecast only to 2.7%, 0.2% lower than the organization predicted back in July 2022.
The IMF says global inflation will reach a new maximum in late 2022, increasing from 4.7% in 2021 to 8.8% for the current year. The report also states that global inflation is likely to decrease to 4.1% in 2024, keeping in mind that the forecast for 2023 is as high as 6.5%.
According to the report, the global economy will see negative growth for the next 2 quarters, and the US, China, and the European Union will continue to slow down. This is even as IMF Managing Director Kristalina Gergieva said the U.S. is remarkably strong in the labor market.
THE IMF FORECAST: A ROLLERCOASTER FOR THE ECONOMY AND THE MARKETS?
What is Hindering Growth According to the IMF
Russian Pipeline Gas Supply to Europe by Route (Jan 2021 – Sept 2022)
China Economic Slowdown (Jan 2021 – Sept 2022)
IMF Growth Projections (2021-2023)
IMF Growth Projections by Region (2021-2023)
IMF Food Price Index and Natural Gas Prices with 2023-2024 Forecast
World Economy: UN Perspective on the Markets
Broad-Based Dollar Appreciation (1980- July 2022)
GDP Pre and Post-COVID-19 Trend
Energy Price Index (Jan 2015-July 2022)
Grain Price Indices (Jan 2015 – July 2022)
Real Short-Term Rates for Advanced Economies, Emerging Markets and Developing Economies
Food and Fuel Prices under the IMF Forecast (Q1 2019 – Q4 2023)
Commodity Price Index with Forecast (2015- Q4 2023)
Commodity Price Index (1970-2022)
What is Hindering Growth According to the IMF
The IMF says we already are in a volatile period from an economic, geopolitical, and ecological perspective. The International Organization calls 3 main events the ones impacting most when it comes to growth globally.
- Russian Invasion of Ukraine – The Economic Implications: One of the main reasons why Ukraine’s current situation is destabilizing the economy can be summarized in three words: Europe’s Energetic Crisis. Moscow is delivering less and less gas to Europe because of the conflict with Kyiv, as well as damages in the mainstream pipelines.
“The prices of necessities like food and energy have soared in the wake of the Ukraine war, a stronger dollar worsens the situation by raising import prices in developing countries,” according to the UNCTAD.
Russian Pipeline Gas Supply to Europe by Route (Jan 2021 – Sept 2022)
- Cost-of-Living Crisis – The Economic Implications: Inflation’s persistent rise is hitting household income and increasing the cost of living, making it more challenging for people to maintain their living standards. Some of them are already struggling to reach a good living standard.
“We see extreme poverty again increasing. … The number of people living on $7 … That’s 47% of the world population [who are living] in poverty. So this is very clear, people are hurting,” Alex van Trotsenburg, World Bank´s Managing Director of Operations said.
China’s Economic Slowdown – The Economic Implications: Among the reasons for China’s economic slowdowns are the country’s “Zero-Covid Policy”, and its lockdowns.
China Economic Slowdown (Jan 2021 – Sept 2022)
The October 2022 Forecast
The IMF forecast for the next two years is not optimistic. The Global economy as well as the advanced economies are lowering by over 1 point from 2022 to 2023. Emerging markets, and developing economies will remain steady.
IMF Growth Projections (2021-2023)
Source: IMF
If we look at it by continent the perspective is even less appealing for most. Even if according to the IMF the US will go 0.6 down, Europe will go down from 3.1 to 0.5, the Middle East and Central Asia from 5.0 to 3.6, and Latin America and the Caribbean from 3.5 to 1.7. The only regions where it appears to be growth forecasted are Sub-Saharian Africa and Emerging and Developing Asia reaching 3.7 and 4.9 respectively.
IMF Growth Projections by Region (2021-2023)
Source: IMF
Below we can see the World Economic Outlook (WEO) of Oct 2022 compared to the one from July 2022. The graph also includes the 2000 – 2001 average. China´s GDP growth is moving away from its 2000-01 average, followed by EMDE commodity importing (excluding Ukraine). While the Euro Area and the EMDE commodity importing (excluding Russia) remained very close to its 2000-20001 GDP growth average in July, the others went away from it showing a GDP decrease.
IMF 2023 Real GDP Growth
Source: IMF
However, not all IMF perspectives are disappointing for the world economy. Food Price Index as well as Natural Gas Prices seem to have little fluctuation over 2023 and even decrease a little by 2024. According to the IMF neither will replicate the peak they had earlier this year.
IMF Food Price Index and Natural Gas Prices with 2023-2024 Forecast
Source: IMF
World Economy: UN Perspective on the Markets
United Nations Conference on Trade and Development (UNCTAD) has issued recession and inflation among one of its latest reports. “The world is headed towards a global recession and prolonged stagnation unless fiscal and monetary policies holding sway in some advanced economies are quickly changed,” an October UNCTAD report said.
Current Interest Rates policies implemented in advanced economies are hitting the most vulnerable countries. The UNCTAD states, “90 developing countries have seen their currencies weaken against the dollar this year – over a third of them by more than 10%.”
Broad-Based Dollar Appreciation (1980- July 2022)
“The prolonged Covid-19 pandemic, Russia’s invasion of Ukraine, and social problems caused by the still rising cost of living will likely translate into increased volatility in the markets. Under such conditions, investors would be still interested in allocating capital to assets considered a safe haven,” says Oliwier Taraszkiewicz, a Tradeview team member.
Currency devaluation is also added to the increased household crisis driven by a rise in commodity prices.
“The conclusions of the latest World Economic Outlook (October 2022), disappointingly, do not inspire optimism. It turns out that according to the IMF report the economic slowdown and inflation in 2023 will be higher than originally expected,” says Oliwier Taraszkiewicz, a Tradeview team member.
According to the UNCTAD, the world economic growth will slow to 2.5% in 2022 and drop to 2.2% in 2023 driving a global slowdown that would leave GDP below its pre-COVID pandemic trend. This will cost over $17 trillion in lost productivity.
GDP Pre and Post-COVID-19 Trend
The UNCTAD argues that interest rate hikes are having a greater impact on the most vulnerable. This is mainly because of increasing living costs, but also because of the fluctuations in the Commodity market.
Energy prices are over the roof. By October 2021 the Energy Price Index changed its trend by jumping to a new high. Since then, prices have been fluctuating up and down in this higher trend. So far energy prices have not gone back to their level before Oct. 2021.
Energy Price Index (Jan 2015-July 2022)
The Grain Index Price on its side started increasing around July 2020. It reached its highest point by May 2021 only to slow down through October of the same year and to reach 2 new high points in March and May 2022.
From May through July 2022 prices lowered reaching prices seen back in January 2022. The graph below shows price indices for Soybean, Corn, and Wheat.
Grain Price Indices (Jan 2015 – July 2022)
Aside from the impact on GDP and commodities, inflation is also affecting the ability of some countries to pay their current debts. Since 2010 we have seen an increase in public debt cost. Even as the year 2021 seems to show a cost decrease, inflation is very likely to make costs reach a new maximum.
Public Debt Rising Cost
The IMF Forecast
Interest Rates
According to the IMF October Report, “to prevent inflation from becoming entrenched, central banks have rapidly lifted nominal policy rates … but because inflation has outstripped these increases, with a few exceptions, real policy rates remain below pre-pandemic levels.”
- The Federal Reserve has increased the federal fund’s target rate by 3 percentage points since early 2022 and has communicated that further rises are likely.
- The Bank of England has raised its policy rate by 2 percentage points since the start of the year despite projecting weak growth.
- The European Central Bank has raised its policy rate by 1.25 percentage points this year.
In the graph below we can see how real short-term interest rates are rising both for advanced economies, emerging markets, and developing economies.
Real Short-Term Rates for Advanced Economies, Emerging Markets and Developing Economies
Commodities
Regarding commodity prices, the IMF report states that food prices have been the “prime driver of global inflation so far this year—have provided a rare slice of good news, with futures prices falling… More generally, some signs show that commodity prices might be starting to ease off as global demand slows, helping to moderate inflation.”
Even as we see that the IMF forecasts moderation in prices for commodities they are not close to reaching the same levels they had back in 2019.
Food and Fuel Prices under the IMF Forecast (Q1 2019 – Q4 2023)
Commodity Price Index with Forecast (2015- Q4 2023)
Commodity Price Index (1970-2022)
“Markets seem to have accepted that inflation is here to stay, despite efforts from the Fed, and other major Central Banks, consumer prices continue to remain high as of today. The IMF’s forecast published in October 2022 supports this.”
Eliman Dambell, Head Analyst at Tradeview Markets
