Aurelia Butler

The IMF has slashed its global growth forecasts and raised its projections for inflation, warning that the risks to the economic outlook are “overwhelmingly tilted to the downside”.The downgraded estimates, released on Tuesday, come as the world grapples with the fallout from Russia’s invasion of Ukraine, prolonged disruptions caused by the coronavirus pandemic and rapidly tightening financial conditions, with central banks seeking to contain soaring prices.The fund now expects growth in gross domestic product to slow to 3.2 per cent in 2022, down 0.4 percentage points from its April estimate and roughly half the pace of last year’s expansion. In 2023, global growth is set to weaken further to 2.9 per cent. Just three months ago, that estimate was 0.7 percentage points higher.Global inflation is likely to intensify, with the IMF raising its forecasts for this year and next by nearly a full percentage point to 8.3 per cent and 5.7 per cent, respectively. The multilateral lender said the economic outlook had become much more gloomy and “extraordinarily uncertain”, with inflation at historic peaks and challenges to growth increasing.Pierre-Olivier Gourinchas, the IMF’s top economist, warned in an interview it would also be an environment that tests the “mettle” of central banks around the world to continue raising interest rates in a bid to restore price stability even if the economy was slowing.“We are in a very critical moment here,” he said. “It’s easy to cool off the economy when the economy is running hot. It’s much harder to reduce inflation when the economy is close to a recession.”

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The risk of a recession is “particularly prominent” in 2023, because by next year growth is expected to bottom out in several countries, stockpiles of savings amassed during the pandemic will have shrunk, and “even small shocks could cause economies to stall”.One “plausible” scenario the fund mapped out is a sharp reduction in Russian energy exports, including a full cessation of the country’s gas supply to Europe, which would further knock back growth and ignite new price pressures.The baseline outlook for Germany, the eurozone’s largest economy and a country acutely exposed to a Russian gas cut off, is already bleak, with the fund now expecting growth of 1.2 per cent this year and just 0.8 per cent in 2023 — a figure almost 2 percentage points lower than estimated back in April. After a 3.2 per cent expansion slated for 2022, the UK is projected to grow just 0.5 per cent next year, the lowest rate across the G7.But Gourinchas stopped short of labelling the forthcoming economic environment as “stagflationary”, akin to the 1970s, maintaining that central banks have much more credibility now than they did then. He said however that “the risk that we may have a global recession has gone up [and] inflation will remain more persistent than we anticipated”.Triggering the more pessimistic growth forecasts were downgrades across the world’s largest economies.Hindered by extensive Covid-19 lockdowns, China’s economy is set to expand just 3.3 per cent this year, 1.1 percentage points less than anticipated in April and set to be the lowest growth in more than four decades, aside from the 2020 shock.For the US, last year’s 5.7 per cent expansion is forecast to more than halve to 2.3 per cent in 2022, before dipping further the following year to just 1 per cent, as soaring inflation eats away at households’ ability to buy goods and services, consumption ebbs and the Federal Reserve’s historically aggressive monetary tightening campaign begins to bite. Compared with April’s projections, the new estimates are each more than 1 percentage point lower.Once adjusted for inflation, “real” GDP growth in the US of only 0.6 per cent on a year-over-year basis is expected in the fourth quarter of 2023. “It doesn’t take much to knock the economy off into something that you might call a technical recession,” Gourinchas said.He added that emerging markets had become a chief concern, as the Fed’s tightening cycle pushed up borrowing costs globally. While “disorderly” financial market conditions had not yet taken root, he said, the big wild card was just how much additional pressure economies could withstand.Emerging markets were likely to come under even more intense pressure should the fund’s alternative scenario of a sharp drop in Russia’s oil and gas exports come to pass, with inflation expectations mounting and central banks forced to tighten monetary policy even more aggressively.Under those circumstances, global growth is forecast to decline in 2022 and 2023 to just 2.6 per cent and 2 per cent, respectively. According to the fund, it has fallen below 2 per cent just five times since the 1970s. The euro area, already set for much lower growth this year than previously forecast, would also be disproportionately affected. The IMF had already revised lower its projections to a 2.6 per cent expansion in 2022 and 1.2 per cent in 2023.

A cessation of Russian gas exports could slash another 1.3 percentage points from the region’s 2023 growth forecast, resulting in “near-zero regional growth”.That is likely to create more problems for the European Central Bank, already facing challenges including how to raise interest rates to fight inflation without causing a new eurozone debt crisis. Gourinchas said a bond-buying tool unveiled by the ECB last week could potentially have a “very large soothing effect” on markets but added it would be a “delicate exercise” to pull off. More

MUMBAI (Reuters) – The Bank of Japan won’t make any quick or drastic changes to its monetary policy framework and is likely to keep interest rates low, even as this week’s board reshuffle brought in less dovish members, former BOJ policy board member Sayuri Shirai said on Tuesday.”Japan’s neutral rate is very low… Together with inflation expectation, Japan’s nominal interest rate will be low,” Shirai told the Reuters Global Markets Forum (GMF).Shirai expected any change in policy from the BOJ to be gradual and carefully orchestrated, which in the near-term could include widening the band of its yield curve control (YCC), so as not to fuel speculative activity in the markets.”Most likely scenario is expanding 10-year yield target range. Of course, new (BOJ) governor may do more flexibility,” she said, adding however, that she did not expect any “big major change”.As part of its efforts to fire up inflation to its 2% target, the BOJ guides short-term rates towards -0.1% and caps the 10-year bond yield around 0% under its YCC policy. GRAPHIC: Yen vs inflation (https://fingfx.thomsonreuters.com/gfx/mkt/lbvgnexrgpq/Pasted%20image%201658790034653.png) Shirai believes inflation in Japan was “just temporary,” driven by commodity price shocks and exacerbated by the yen’s depreciation, but not supported by a significant rise in household consumption. She did not expect to see a sharper depreciation in the yen going forward.”Prices may remain high, but rate of inflation is likely to decline. Clearly, we will see a decline in inflation from April next year… from around 2% to a little above 1%,” Shirai said.With interest rates and inflation rising across the globe, markets have been rife with speculation the BOJ could dial back stimulus once the dovish Governor Haruhiko Kuroda departs.”Depending on market condition, if time arose, it’s possible the BOJ will do discontinuation of additional flexibility. But probably with any possibility of speculation, I think BOJ will be very careful,” Shirai said.(Join GMF, a chat room hosted on Refinitiv Messenger: https://refini.tv/33uoFoQ) More

The decision was in line with the median forecast of 14 economists in a Reuters poll last week. At 1204 GMT, the forint, which sank to a record low versus the euro earlier this month, traded at 401 per euro, a touch weaker than immediately before the announcement.The weakness of the forint, which is complicating the NBH’s inflation challenge, has forced the bank into its steepest tightening cycle since the collapse of communism, with rate hikes now totalling 485 bps over the past month alone.”The (Monetary Council) has vowed to decisively continue with the tightening cycle until inflation has clearly peaked (anticipated by autumn), and this promise has helped the forint exchange rate recover in recent weeks,” Commerzbank (ETR:CBKG) said.Hungary’s twin deficits and lack of access to European Union funds had prompted investors to sell the forint amid worsening sentiment on international markets, which forced the government to scrap a price cap on energy bills for higher-usage households.This is expected to raise inflation further, while helping to rein in the budget deficit.Despite gains to around 400, the forint is still down nearly 8% versus the euro this year, underperforming its regional peers and complicating the NBH’s task of curbing inflation.Economists polled by Reuters forecast headline inflation averaging 12.2% this year, easing to 9.95% in 2023, still far above the NBH’s 2% to 4% target range.Analysts now see the base rate rising to 12% by the end of 2022, which would be its highest level in nearly two decades. More