AFP

Global growth is expected to slow further next year, the IMF said Tuesday, downgrading its forecasts as countries grapple with the fallout from Russia’s invasion of Ukraine, spiraling cost-of-living and economic downturns.

The world economy has been dealt multiple blows, with the war in Ukraine driving up food and energy prices following the coronavirus outbreak, while soaring costs and rising interest rates threaten to reverberate around the globe.

“This year’s shocks will re-open economic wounds that were only partially healed post-pandemic,” said International Monetary Fund economic counsellor Pierre-Olivier Gourinchas in a blog post accompanying the fund’s latest World Economic Outlook.

More than a third of the global economy is headed for contraction this year or next, and the three biggest economies –- the United States, European Union and China –- will continue to stall, he warned.

“The worst is yet to come and, for many people 2023 will feel like a recession,” said Gourinchas.

In its report, the IMF trimmed its 2023 global GDP forecast to 2.7 percent, 0.2 points down from July expectations.

Its world growth forecast for this year remains unchanged at 3.2 percent.

The global growth profile is its “weakest” since 2001, apart from during the global financial crisis and the worst of the pandemic, the IMF said.

This reflects slowdowns for the biggest economies, including a US GDP contraction in the first half of 2022 and continued lockdowns in China as it faces a property market crisis.

– Laser focus –

A key factor behind the slowdown is a shift in policy as central banks try to bring down soaring inflation, with higher interest rates starting to take the heat out of domestic demand.

Growing price pressures are the most immediate threat to prosperity, said Gourinchas in the report, adding that central banks are now “laser-focused on restoring price stability”.

Global inflation is expected to peak at 9.5 percent this year before dropping to 4.1 percent by 2024.

Misjudging the persistence of inflation could prove detrimental to future macroeconomic stability, he warned, “by gravely undermining the hard-won credibility of central banks.”

Asked about the Federal Reserve’s rate hikes, Gourinchas told a press briefing on Tuesday that the IMF is not calling for an acceleration, but this “doesn’t mean that they should pause on the path… that we’ve seen” either. 

This is because banks were starting from a point where rates were historically low as countries emerged from the pandemic, he said.

Current challenges do not mean a large downturn is inevitable, but the fund also warned many low-income countries are either in, or close to debt distress.

Progress toward debt restructurings for the hardest-hit is needed to avoid a wave of sovereign debt crisis.

“Time may soon be running out,” said Gourinchas.

While the G20 has agreed on a “common framework” for debt restructuring for the poorest countries, only three have qualified and “more progress is needed,” he told reporters.

– US slowdown –

The IMF has also cut forecasts for the world’s two biggest economies, the United States and China.

US economic growth for this year is now pegged at 1.6 percent, 0.7 points below the fund’s July forecast, due to an “unexpected real GDP contraction in the second quarter,” the IMF said.

“Declining real disposable income continues to eat into consumer demand, and higher interest rates are taking an important toll on spending,” the report added.

The Federal Reserve has been raising interest rates aggressively to tamp down surging inflation, which is slowing economic activity. And the central bank has said more increases are likely to come.

A slowdown in the Euro area is expected to deepen next year, with the German and Italian economies slightly contracting, the IMF projects.

China’s economy is expected to grow at only 3.2 percent this year — its lowest rate in decades, apart from the initial coronavirus outbreak.

The fund cautioned that a worsening of China’s property sector slump could spill over to the domestic banking sector and weigh heavily on growth.

The Bank of England on Tuesday unveiled yet more measures aimed at calming markets rocked by a UK budget as it warned over risks to the nation’s financial stability.

The week had already seen action taken by the BoE and UK government aimed at bringing calm to bond markets in particular as state borrowing soars.

The moves are a response to soaring UK bond yields and after the pound tumbled to a record low against the dollar since the government of new Prime Minister Liz Truss unveiled debt-fuelled tax cuts in a budget last month.

A day after it launched a temporary facility aimed at easing liquidity pressures, the central bank Tuesday said it was widening the scope of daily purchases of UK government bonds, or gilts, until Friday.

In a statement, the BoE said the latest action would “act as a further backstop to restore orderly market conditions”. 

It noted that “the beginning of this week has seen a further significant repricing of UK government debt, particularly index-linked gilts”, which the central bank will now purchase under its wider operation of bond purchases.

“Dysfunction in this market, and the prospect of self-reinforcing ‘fire sale’ dynamics pose a material risk to UK financial stability,” it added.

Tuesday’s intervention by the BoE resulted in a small drop in yields but they edged back into positive territory in the afternoon, while the pound rose versus the dollar.

“The key sticking point is that the support measures are only scheduled to last until Friday,” noted AJ Bell investment director Russ Mould.

“Extending it could go one of two ways — the market either applauds the move and breathes a sigh of relief or it gets even more worried, thinking that the extra time suggests the crisis is more severe than originally thought.”

– Unemployment down –

In some positive news, official data Tuesday revealed British unemployment fell to a near 50-year low at 3.5 percent.

Wages, however, continue to be eroded by decades-high inflation that threatens to send Britain into recession.

The British government on Monday brought forward key growth and inflation forecasts to Halloween, hoping not to spook markets further.

Finance minister Kwasi Kwarteng will unveil debt-reduction plans and UK economic predictions on October 31 rather than in late November.

It comes after Kwarteng was already forced to axe a tax cut for the richest earners, in the face of outrage as millions of Britons face a cost-of-living crisis with UK inflation around 10 percent.

– ‘Painful cuts’ –

Britain meanwhile faces “painful” cuts in public spending to fix state finances should it decide against more U-turns over tax cuts, a leading think tank warned.

“With a weaker economy, getting government finances on a sustainable path without cancelling tax cuts could force… big and painful spending cuts,” the Institute for Fiscal Studies said in a study.

The budget was widely criticised, including by the International Monetary Fund, over fears that government debt would balloon to pay for the tax cuts, including on salaries of all UK workers.

Added to the gloom on Tuesday, the IMF forecast that UK economic growth would slow sharply from 3.6 percent this year to just 0.3 percent in 2023 — and warned the budget would “complicate” efforts to fight inflation.

Fitch last week lowered the outlook on its credit rating for British government debt to negative from stable.

The BoE has piled on further pressure by ramping up its main interest rate to a 14-year high of 2.25 percent in a bid to cool inflation — and is expected to hike even further next month.

This in turn has seen retail banks ramp up interest rates on mortgages, with analysts predicting heavy price falls for property.

Climate change risks undermining global energy security unless the use of renewables is dramatically scaled up, the UN warned Tuesday, suggesting the Ukraine conflict’s ripple effects could speed up the green transition.

Not only is the energy sector a major source of the carbon emissions that drive climate change, it is also increasingly vulnerable to the shifts that come with a heating planet, the UN’s World Meteorological Organization stressed.

In its State of Climate Services annual report, the WMO warned that increasingly intense extreme weather events, droughts, floods and sea-level rise — all linked to climate change — were already making energy supply less reliable.

It pointed, for instance, to a historic heatwave that sparked massive power outages in Buenos Aires in January, while experts mentioned recently disrupted electricity production amid heatwaves and shrinking reservoirs in Europe and China.

WMO Secretary-General Petteri Taalas warned that “in the future these kinds of events will become more and more frequent”, pointing out that much of the world’s energy infrastructure is today in areas vulnerable to climate change.

In 2020, a massive 87 percent of global electricity generated by thermal, nuclear and hydroelectric power plants directly depended on having freshwater for cooling, the WMO said.

– ‘Changing before our eyes’ –

But a third of power plants running on fossil fuels are in areas of high water stress, as are 15 percent of existing nuclear power plants — a share expected to swell to 25 percent in the next 20 years.

Eleven percent of hydroelectric dams are also located in highly water-stressed areas, while more than a quarter of hydropower plants are in river basins struggling with water scarcity, the WMO said. 

“Time is not on our side and our climate is changing before our eyes,” Taalas said.

“We need a complete transformation of the global energy system.” 

Taalas pointed out that the energy sector is itself a part of the problem since it is the source of around three quarters of global greenhouse gas emissions that are changing the climate.

“Switching to clean forms of energy generation… and improving energy efficiency is vital,” he said.

But he cautioned that reaching net-zero emissions by 2050 would only be possible “if we double the supply of low-emissions electricity within the next eight years”.

– ‘A blessing’ –

The report, which WMO drafts with input from more than two dozen organisations, said shifting to renewable energy would help alleviate growing global water stress, pointing out that the amount of water used by solar and wind is much lower than for traditional power plants.

The energy security crisis caused by the war in Ukraine and disrupted access to Russian gas has sparked fears that countries will fall back on dirty fuel sources like coal.

Taalas acknowledged this could be the case in the short term, but said the war was demonstrating the dangers of dependence on unreliable energy sources, and would surely speed up the green transition.

“From a climate perspective, the war in Ukraine may be seen as a blessing,” he said. 

– Invest in Africa –

WMO warned that the current pledges by countries to cut carbon emissions “fall well short” of what is needed to meet the objectives set by the 2015 Paris Agreement on climate change.

The report said global investments in renewable energy “need to triple by 2050 to put the world on a net-zero trajectory”.

It called in particular for more clean energy investments in Africa.

The continent, which is already facing massive droughts and other severe effects from climate change, has seen only two percent of clean energy investment in the past two decades.

And yet with 60 percent of the best solar resources on the planet, it has the potential to become a major player in solar energy production, the report said.

However, significant investments are required.

“Bringing access to modern energy for all Africans calls for an investment of $25 billion annually,” the report said.

That is the equivalent of around one percent of global energy investment today.

Stock markets and oil prices slumped Tuesday as investors grow increasingly fearful that more big interest rate hikes will tip economies into deep recessions.

The mood darkened also on the worsening Ukraine war and weaker demand expectations in China.

With the focus on inflation, analysts said US consumer price index data released later this week will be crucial to the direction of risk assets. 

Another big reading could spark a fresh equity selloff and a surge in the dollar.

“There is growing pessimism in the markets now and with some big data points to come from the US this week, not to mention the start of earnings season,” noted Craig Erlam, analyst at OANDA trading group.

“Investors should probably brace for more volatility.”

Traders had hoped that bumper rate increases by the US Federal Reserve this year would begin to drag on the economy and slow runaway prices, allowing policymakers to reduce the pace of monetary tightening.

But a forecast-beating US jobs report on Friday highlighted the tough work the country’s central bank has slowing inflation from four-decade highs, and many observers warn recession is virtually inevitable.

– ‘Real danger’ –

World Bank chief David Malpass said there was a “real danger” of a global contraction next year, adding that the surge in the dollar was weakening the developing nations’ currencies and pushing their debt to “burdensome” levels.

And JP Morgan boss Jamie Dimon told CNBC that while the US economy was holding up, it faced several headwinds including rising rates, surging inflation, Fed tightening and the Ukraine war.

He added that he saw a US recession in six to nine months, and that the S&P 500 could fall another 20 percent.

Barings strategist Christopher Smart said: “It’s little wonder investors enter the week in a dreary mood, especially with headlines from Ukraine signalling a further escalation in geopolitical tensions.”

Chip manufacturers globally took a pounding from new US export controls aimed at restricting China’s ability to buy and make high-end chips with military applications.

The Philadelphia Stock Exchange Semiconductor Index saw its lowest close since late 2020, while Bloomberg News reported that $240 billion had been slashed from companies’ market values worldwide.

– Dollar dips –

Taipei led the losses in Asia — diving more than four percent — as chip giant TSMC plunged 8.3 percent, while a hefty selloff in Samsung Electronics dragged Seoul down 1.6 percent. Tokyo was also sharply lower owing to a hit to tech firms.

All three markets had been closed Monday and were reacting to Friday’s US announcement for the first time.

On currency markets, the dollar dipped after recent strong gains as the United States heads the monetary tightening drive.

The pound nevertheless remained under pressure despite the Bank of England unveiling further measures to calm markets rocked by a UK budget, saying it would increase purchases of government bonds.

“Investors fear that the UK government is borrowing too much and that it won’t be able to balance its books,” said City Index and FOREX.com analyst Fawad Razaqzada.

Oil prices fell sharply, with concerns about Chinese demand front and centre.

“Covid cases are picking up in the country, and the Chinese Communist Party’s newspaper, the People’s Daily, ran a commentary saying the Covid Zero policy is ‘sustainable’, indicating that the country is likely to keep following it if not double down,” said Stephen Innes at SPI Asset Management. 

– Key figures around 1330 GMT –

London – FTSE 100: DOWN 0.8 percent at 6,903.83 points

Frankfurt – DAX: DOWN 0.6 percent at 12,198.54

Paris – CAC 40: DOWN 0.4 percent at 5,815.38

EURO STOXX 50: DOWN 0.6 percent at 3,336.12

New York – Dow: DOWN 0.3 percent at 29,114.89

Tokyo – Nikkei 225: DOWN 2.6 percent at 26,401.25 (close)

Hong Kong – Hang Seng Index: DOWN 2.2 percent at 16,832.36 (close)

Shanghai – Composite: UP 0.2 percent at 2,979.79 (close)

Euro/dollar: UP at $0.9716 from $0.9708 on Monday

Pound/dollar: UP at $1.1085 from $1.1059

Euro/pound: DOWN at 87.74 pence from 87.76 pence

Dollar/yen: DOWN at 145.68 yen from 145.72 yen

West Texas Intermediate: DOWN 2.0 percent at $89.03 per barrel

Brent North Sea crude: DOWN 1.8 percent at $94.45 per barrel

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