IMF Global Growth

The IMF gave Boris Johnson yet another reason to party yesterday as they forecast that the UK will again be the fastest growing major industrial economy for a second year running, placing it at the top of the growth table in 2022. The Fund forecasts growth this year will come in at 4.7%, after last year’s 7.2% increase. The 4.7% prediction is 0.3% less than the IMF forecast last year. 

However, the IMF was much more aggressive in lowering its forecasts for the rest of the world, citing the ongoing disruption brought by restrictions to stop the latest Omicron variant, as well as surging energy prices along with continued supply chain bottlenecks along with worker shortages. The Fund now believes that global growth will be 4.4% this year, down 0.5% from its October forecast. The cut in this year’s forecast is largely led by the world's two largest economies - the United States and China. Next year’s forecast has been upgraded by 0.2% to 3.8%. 
The US had the biggest downgrade, down 1.2% to 4%, with China’s growth forecast being reduced by 0.8% to 4.8%. There were also 0.8% cuts in Canada and German growth, to 4.1% and 3.8% respectively, with Italy now at 3.8% and France 3.5%, both 0.4% lower. 

“The risks to the global baseline are tilted to the downside” the IMF said. “The emergence of new Covid-19 variants could prolong the pandemic and induce renewed economic disruptions. Moreover, supply chain disruptions, energy price volatility, and localised wage pressures mean uncertainty around inflation and policy paths is high.”
 
With regards to inflation, the IMF raised its 2022 forecasts for both advanced and emerging markets and developing economies, adding that it expects elevated price levels to persist. It now expects inflation to average 3.9% in advanced economies and 5.9% in emerging markets and developing economies in 2022, before subsiding next year.
 
There was also a warning for central banks to be open and transparent in their messages when it comes to monetary policies. “It is key to communicate well the policy transition towards a tightening stance to ensure orderly market reaction. Where core inflationary pressures remain subdued, and recoveries incomplete, monetary policy can remain accommodative”, the IMF said. 

Among factors that pose risks to its outlook, the IMF cited the emergence of deadlier coronavirus variants, China's zero-COVID strategy, which could add to supply chain disruptions, the real estate sector in China, and aggressive monetary tightening by the Federal Reserve. Of course, we also have the ongoing Russia-Ukraine tensions. 

We wrote a few days ago about our thoughts on a Fed policy error. We stated:
 
The threat of elevated inflation globally is sending many central bankers and policymakers into reaction mode, as many find themselves “behind the curve”; we believe this creates an environment for policy error. The Fed, for example, could overtighten at a time when the economy is not strong enough to cope with higher interest rates. Throw into the equation a sharp withdrawal of liquidity (globally) amid slowing growth and higher interest rates, and we have heightened recession risk.
 
Fixed Income Team