Confirming that economic sentiment is still strong
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The International Monetary Fund released its latest report on markets earlier today.
Semi-annual World Economic Outlook Report
It has a new outlook for 2023 after a recent change in its mood (to reflect the recent meltdown in the global stock markets) and a recent reduction in the risks, following the US's avoidance of a default.
The IMF stated that 'the recent resolution of US debt ceiling standoff, and earlier this year's strong actions by authorities to contain turmoil in US and Swiss banks, reduced the immediate risk of financial sector chaos. This moderated the adverse risks for the outlook.
The IMF stated that the global GDP will increase by 3% by 2023.
World Outlook Report
Released Tuesday. The IMF released its latest report on Tuesday.
When we dig deeper into the report, we find:
IMF predicts that the US will grow by 1.8% in 2018, a 0.2% rise from April. Then, it will slow to 1% growth in 2024.
China's growth is expected to be 5.2% in 2018, unchanged from the previous projection. It warned, however, that the recovery of the nation following the post pandemic reopening in January this year was slowing down, partly due to softness within the real estate sector, which is hurting investment as well as weakening foreign demand and increasing youth unemployment.
Saudi Arabia will be the country to experience the largest growth slowdown. The GDP growth is projected to fall from 8.7% to 1.9% in 2022, a reduction of 1.2% from the previous forecast. This is due to the drop in oil prices and the oil production cuts announced in June and April.
The UK GDP was revised up by 0.7%, to 0.4%, due to better than expected consumption, falling energy costs, fewer concerns about Brexit and a resilient finance sector
The GDP of Russia also increased by 0.8%, bringing it to 1.5%, based on a strong start to the year in retail trade, industrial production and construction, fueled by fiscal stimulus
Brazil's GDP grew by 1.2% to 2.1% after an early-year surge in agricultural production, which helped boost activity in services.
Germany will be the only country in 2023 to experience a recession, as its GDP is projected to contract by 0.3%. This is compared to a previous forecast of a 0.1% decline, due in part because of a weak manufacturing output, and a contraction in the economy in the first quarter.
The IMF, despite its modestly more positive global outlook, warned that the prospects for growth are weaker than the average of 3.8% during the 20 years prior to the Covid-19 Pandemic. It also stated that the balance of global growth risks is still tilted towards the downside.
The DC-based fund says that higher interest rates will have a negative impact on the economy, as we've already seen in the record decline in European loan demand.
Further shocks, such as an intensification of the conflict in Ukraine or "climate catastrophes", could lead to even more tightening by central banks. Bloomberg Economics' outlook, in comparison to that of the IMF is subdued. Its base case assumes global GDP growth at 2.8% in 2020, and then a dip to 2.7% by 2024. This is down from 3.3% for 2022, and below the 3.4% trend before the pandemic.
The IMF also noted that continued threats to financial stability were caused by i.) higher interest rates, ii.) a slower than expected recovery in China, and iii.) debt distress among emerging economies.
IMF: Even though tighter monetary policies may reduce growth in some economies, the IMF stated that the most important thing is to achieve sustained disinflation.
Central banks should remain focused on restoring stability to the price level and strengthening financial oversight and risk monitoring.
This is expected to happen this week when the Fed and ECB both plan to increase interest rates.
The IMF predicts that inflation will slow to 6.8% in this year from the 7% predicted in April and 8.7% in 2022. At the same,
The fund has also increased its projections for the cost of living increases in 2024 from 5.2% to 5.3%.
It is predicting that core prices (excluding food and energy) will cool down more slowly than previously.
The IMF stated that the advanced economies are responsible for the global slowdown from 3.5% last year, mainly because manufacturing is weaker than services. The IMF said that the activity in emerging and developing economies will remain stable for this year and next.
The Financial Times
IMF economist Pierre-Olivier Gourinchas stated that the outlook for the economy had improved since April, when the multilateral lender published its last projections amid a period of stress in the banking sector.
He said that things were moving in the right directions, and there was less risk of the global economy slipping below 2%, as the financial risks have abated. (Again, the IMF, like the Fed, is always wrong with its forecasts, so this should cause great concern).
The IMF warned that, besides inflation, debt distress in developing economies is a major concern. This is despite the fact that emerging countries are generally'resilient to volatility on financial markets'.
A second concern is that, even though headline rates have fallen sharply, the strong labor market and robust consumer demand could make it difficult to eradicate inflation. This will force central banks to tighten their monetary policies.
Gourinchas predicted little respite from rate-setters, even as the era 'of 'outsized hikes'is coming to an end. He said that we are approaching the peak of the hike cycle but not yet there. We'll see central banks hold their positions until they're confident that the economy's on the right path.
Gourinchas stated that if central banks continue to keep interest rates higher than what investors expect, the market may at some point realize its expectations about borrowing costs.
Currently, the markets are expecting central banks like the Fed to start cutting rates at the beginning of the year. If these bets turn out to be incorrect, "that would lead some repricing. And then you could have a chain reaction that creates volatility".