In its latest World Economic Outlook, the IMF revised global growth forecasts lower for 2022 and 2023. The forecast for global GDP growth was downgraded by 0.8 of a percentage point for this year and 0.2 of a point for next year.
Adverse growth revisions across developed economies and large emerging markets are evident when you look at more frequently updated economists’ forecasts. While Russia has suffered the worst slump, most developed economies and large emerging markets also exhibit generalised, though modest, deteriorations in their outlooks.
At 3.6% for this year and next, the global growth forecast remains above the 3% threshold for global recession. However, this should offer scant comfort. GDP forecasts are inherently unstable and always under revision. Revisions have momentum and downgrades, once they start, typically stop only when policymakers shift towards a more pro-growth posture. Policymakers are not able to support growth now. They must in fact do the opposite. Consequently, the global growth outlook will deteriorate further.
The global economy was always going to have to digest the simultaneous withdrawal of fiscal and monetary policy support in 2022. However, surprisingly high prices suggest the extent of the slowdown needed to balance things could be more than initially expected.
Central banks are trying to lean into the inflation conflagration started partly by themselves by providing giddying levels of monetary support into the crisis in 2020, augmented by spikes in food and fuel prices as a result of the war in Ukraine. Two-thirds of the 38 central banks tracked by the Bank for International Settlements have hiked rates so far in 2022. Ten or more hiked each month since October 2021. The last time we saw this intensity and co-ordination in central bank monetary policy tightening was before the 2008 financial crisis.
The other macroeconomic policy lever, fiscal expansion, is also not available. Governments ran war-level deficits, and debt levels soared. Fiscal space was exhausted. High prices suggest those economies that monetised their debt via quantitative easing can no longer do so. Even modern monetary theorists concede that high inflation is the one condition under which monetisation fails.
China, which previously came to the global economy’s rescue via a debt-supported expansion in capital expenditure, is not able to do so now. It must contend with an ailing or failing property sector and the calamitous effect of its zero-Covid policy on economic activity. It doesn’t look like any saviours are coming in this global economic slowdown.
Negative growth revisions are always disruptive and will dominate markets and economies for the next few quarters. The IMF outlined how potentially damaging the coming months could be for African countries, whose economies have not recovered from the Covid crisis and must now absorb the food and fuel price shock from the war in Ukraine. According to the IMF, “about 60% of low-income countries are now at high risk of or already in debt distress, compared with fewer than 30% in 2015”.
The IMF and other lenders must tread carefully to lean into the damage debt defaults could have on emerging-market countries and the global economy in general. Even then, given the players in the sovereign debt space, the scope for co-ordination and policy error is immense. Even if countries do not default, high debt levels themselves can trap economies in low-growth equilibria. SA is at risk of this outcome.
That policymakers cannot respond to a worsening economic outlook due to high inflation and high debt levels will create a drag on financial conditions and financial assets as investors are pushed down the risk spectrum. This is bad for assets that benefited from the pro-growth policy posture adopted by fiscal and monetary policymakers in the wake of Covid crisis in 2020. Valuations of everything from emerging-market currencies to commodities, equities and corporate bonds, are now at risk. We must brace.
• Lijane works in fixed-income sales and strategy at Absa Corporate & Investment Banking.
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