The sluggish state of the world economy was laid bare by the latest forecasts released by the International Monetary Fund (IMF) this week, coinciding with its annual meetings that are taking place in Marrakech.
There are different ways of measuring global economic growth, and in many respects it doesn’t matter which one you use as long as you stick with the same one.
For instance, the IMF’s assessment of global economic growth based on market exchange rates is often cited and suggests that after a post-pandemic rebound of 6.1% in 2021, growth of 3% last year will be followed by only 2.5% this year and 2.4% in 2024. Yet attention tends to be focused on the IMF’s measure of real GDP. This, too, points to a very weak global outlook.
From 2000 to 2019, the average rate of global economic growth based on this measure was 3.8%. Ahead of the pandemic, a figure around 3% would be seen as very weak, and be consistent with some regions either being in or skirting with recession. Now the IMF seems to think that a weak global picture is the new normal. After 3.5% growth last year the world economy is expected to grow by only 3% this year and 2.9% in 2024.
While ‘Navigating global divergences’ was the title that the IMF gave to its report, the reality is that there are common themes, which I would cite as: the loss of momentum following the post-pandemic rebound; the legacy of the recent surge in inflation and the transition to monetary policy normalisation in western economies; and the tougher global capital market climate that is following from this.
One of the consequences of this was laid bare in its accompanying ‘Fiscal Monitor’ publication, which outlined a dismal outlook for global debt. The ratio of gross debt to GDP is expected to remain high across the globe. For the G7 this ratio rises from 127.8% this year to 134.3% at the end of the five-year forecasting period in 2028. For the G20 the deterioration is from 122.7% to 129.0%.
This dismal outlook has many consequences. One is that it should highlight the limited scope for fiscal manoeuvre in many countries, and one effect of this will be the increased pressure this may place on monetary policy to act as shock absorber in the face of weak growth, especially if inflation decelerates. But the likelihood is that even allowing for this, policy rates will have to settle at a high level in future and above what is set to be a lower rate of inflation than now.
Also, the difficult fiscal outlook has recently focussed attention on the scale of supply confronting government bond markets. Uncertainty about fiscal prospects in the US has helped feed the recent rise in real yields that has driven bond yields higher. The latest upward move in yields has not been driven by inflation fears but a rise in the term premium and this looks set to rise further.
Globally, the IMF’s forecasts fit with the picture of an improving inflation climate: with global inflation decelerating from 8.7% last year to 6.9% this year and 5.8% in 2024. It is unclear where inflation will settle. The IMF’s view is that consumer price inflation in advanced economies will be back at 2% by the end of the forecast period. It reminded me of Mervyn King’s observation, albeit in reference to the UK, that forecasters always assumed inflation would return to the two percent target. Perhaps we should attach more relevance to the IMF’s forecast of 3% CPI inflation in 2024. That seems more consistent with where inflation might settle.
The slower pace of China’s growth is a significant influence given that it accounted for about two-fifths of global growth pre pandemic. And while India is expected to grow around 6% to 7% the scale of this is not sufficient to match the shortfall from China. Moreover, it still represents a growth rate far less than India’s potential. I would not be surprised if future growth there is far higher.
A notable feature of the IMF report is the weakness in global trade, with the volume of trade expected to rise only 0.9% this year. This mirrors what we are already seeing in weak PMI and other indicators. Next year trade volumes are estimated to be up 3.5%.
I think the IMF is right to be cautious about UK growth but as has been the tendency recently, the narrative the IMF uses around the UK tends to be far more negative than is justified by the UK’s relative performance compared with major European economies.
The IMF saw the UK growing 4.1% last year and only 0.5% this year and 0.6% in 2024, but the IMF has not included either the latest upgraded update to UK GDP data nor factored in a recent downward revision to market exceptions that policy rates will peak at a lower level than previously expected. Factoring these in would likely have led to a better profile for UK growth.
Notwithstanding that, even on its forecasts the cumulative UK growth over 2022-24 of 5.2% exceeds what the IMF forecasts for Italy, France and Germany (which is seen as up 2.2% over this period, although next year Germany is expected to grow at a higher rate than the UK). Western Europe is the slow growth region of the global economy.
The release of these IMF forecasts fits in many respects with the latest movements in financial markets. There is an expectation that, in western economies, policy rates may settle at a high level and sitting alongside an expectation of modest growth.
Please note, the value of your investments can go down as well as up.