The IMF’s new World Economic Outlook (that’s a proper noun) is here. Who’s excited?
These regularly scheduled tomes are often billed as though they’re akin to the latest episode of a viral Netflix series. In reality, traders don’t generally care, and exactly no one reads the full report. The April edition clocked in at a truly impressive 206 pages. If you read the whole thing Tuesday, you’re ChatGPT.
It was notable that the IMF doesn’t see global growth returning to pre-COVID levels anytime in the near future. The Fund didn’t say “never,” but they did say that, “Looking out to 2028, global growth is forecast at 3.0%, the lowest medium-term growth forecast published in all WEO reports since 1990.” I suppose it’s fair to say that COVID, along with the first real European ground war since the Reich, left an indelible mark.
Growth was 3.4% last year, and is seen at 2.8% this year. For advanced economies, the slowdown will be “especially pronounced,” the IMF cautioned.
It was just three months ago when the Fund said a “turning point” was at hand. Now, the IMF says the outlook is “uncertain again.”
US growth is expected to slow to 1.6% this year. The IMF sees a slight contraction for Germany and the UK, and expects Russia’s economy to log a 0.7% expansion. I’d be remiss not to note that Russia escaped 2022 with a relatively minor 2.1% contraction, nowhere near as bad as most expected following a blitz of economic sanctions. The Chinese economy is expected to grow 5.2% in 2023.
The inflation outlook is challenging, to put it politely. Core inflation is expected to remain stubborn and “in most cases,” inflation isn’t seen returning to target before 2025, the IMF said.
Risks are myriad. That goes without saying. But the IMF said it anyway, using enough words to fill a library. In his summary blog, Pierre-Olivier Gourinchas offered the following on the near implosion of the UK LDI complex in October and last month’s regional banking turmoil in the US:
Following a prolonged period of muted inflation and low interest rates, the financial sector had become too complacent about maturity and liquidity mismatches. Last year’s rapid tightening of monetary policy triggered sizable losses on long-term fixed-income assets and raised funding costs.
The stability of any financial system hinges on its ability to absorb losses without recourse to taxpayers’ money. The brief instability in the United Kingdom’s gilt market last fall and the recent banking turbulence in the United States underscore that significant vulnerabilities exist both among banks and nonbank financial intermediaries. In both cases, financial and monetary authorities took quick and strong action and, so far, have prevented further instability.
Yes, “so far.” But, as JPMorgan has been keen to point out, not all carry trades can be backstopped, and thanks to a dozen years of overzealous (some would be less generous in their choice of adjectives) monetary accommodation, the entire world is one giant carry trade, just waiting to explode.
The IMF has a “severe downside” case characterized by, among other things, a curtailment of bank lending exacerbated by a risk-off event that further impacts credit conditions and public finances. In such a situation, policymakers could confront “large capital outflows, a sudden increase in risk premia, dollar appreciation in a rush to safety and major declines in global activity amid lower confidence, household spending and investment.”
The Fund assigns 15% subjective odds to a version of the severe downside scenario in which global growth could be just 1%.
Gourinchas went on to say the world is “entering a tricky phase,” defined by subpar growth, rising financial stability risks and still-high inflation, which “has not yet decisively turned the corner.”
The IMF managed to encapsulate the vexing situation facing humanity in just one sentence, which served as the heading on the “Overview” page. “The outlook is uncertain again amid financial sector turmoil, high inflation, ongoing effects of Russia’s invasion of Ukraine and three years of COVID,” the Fund said.
Put differently: It’s difficult to forecast from here due to a nascent bank panic, inflation, war and the lingering effects of widespread, global pestilence.
I’m still old and as I remember a recession would be marked by negative growth, rather than just disappointing slow growth (1%, say).
Global risks have been a greater concern since February of last year when Putin invaded Ukraine. Germany changed radically after WWII. Eastern Europe and Ukraine and Russia are radically changing in real time with the war.
To me as an investor, global risks are the foul balls that bean you in the head when you’re sitting in the upper deck on the 3rd base line in a stadium filled with forty thousand people.
“ the entire world is one giant carry trade, just waiting to explode.”
I just don’t see how the Great Reset doesn’t happen. Financially and politically.
Essentially the Great Reset will lay the foundation for the political will to implement various UBI programs (Food stamps for everyone, monthly housing stipends, universal healthcare, etc). I understand that old school ideologies have no capacity to contextualize the moral imperative of UBI, but modern economies have essentially become math problems. Modern economies do not create enough wages for labor/consumers to live off of without systemic poverty for a growing portion of society. UBI is the only solution that I’ve come across.
Right now in any city you need to be a top 20% income earner to be a new entrant into the home owner class and in major cities you need to be top 5%. Rural communities are more affordable, but not by that much. This dynamic cannot last.