Aurelia Butler

The IMF is preparing to lower its growth forecasts for the global economy this year and next amid rising inflation and commodity price shocks driven by Russia’s invasion of Ukraine. “Recent indicators imply a weak second quarter — and we will be projecting a further downgrade to global growth for both 2022 and 2023 in our World Economic Outlook Update later this month,” said Kristalina Georgieva, managing director of the IMF, in a blog post published on Wednesday. In April, the IMF predicted global growth of 3.6 per cent for this year and next — downgraded from the January estimates of 4.4 per cent and 3.8 per cent respectively — and warned of potential downside risks. Georgieva said several of these risks had materialised, with commodity price shocks driven by the Ukraine war creating a “cost of living crisis” that was “only getting worse”.The warning comes on the same day as the Washington-based think-tank, the Peterson Institute for International Economics, cautioned that the Federal Reserve would be unable to control inflation without an increase in unemployment. Officials at the Fed believe that the job market could be cooled by lowering vacancies rather than raising unemployment. However, the paper, authored by a team that included former IMF chief economist Olivier Blanchard and former US Treasury secretary Larry Summers, said that this “flies in the face of empirical evidence”. US inflation hit 9.1 per cent in the year to June, raising the prospect of larger than expected rate rises by the Fed later this month. Meanwhile, Germany, Europe’s largest economy, is facing the prospect of severe gas shortages this winter with energy prices already spiking. A further “disruption in the natural gas supply to Europe” could trigger a “global energy crisis” and “plunge many economies into recession”, Georgieva said. Commodity price shocks have fed into rising inflation, which has triggered a near universal tightening cycle by global central banks. While the IMF thinks that “acting now” to curb inflation “will hurt less than acting later”, further rate rises are likely to dampen growth and employment around the world. Markets have already started to coalesce around the idea that a global recession may be more likely than first thought, with broad declines recorded in a range of commodity markets last week as investors bet that higher borrowing costs would start weighing significantly on demand. Tightening monetary conditions are of particular concern to emerging markets, as rising rates in developed countries results in capital outflows and increases the cost of borrowing from foreign investors. Sovereign bond yields for foreign-currency denominated debt are sitting at more than 10 per cent in about a third of emerging economies. This is “close to the highs last seen after the global financial crisis” said Georgieva.

She encouraged policymakers to stand ready with “foreign exchange interventions or “capital flow management measures” in addition to “pre-emptively reducing reliance on foreign currency borrowing” to get everyone “safely to the other side of this tightening cycle” and avoid a debt crisis in emerging markets. War-driven increases to essential goods are also beginning to weigh on the poorest nations and threatening to push an additional 71mn people into extreme poverty. Without action and support from advanced economies, this will lead to further “hunger, malnutrition and migration”, said Georgieva. The IMF managing director warned that “risks of social instability” were increasing and called for more global co-operation to address the scale and interrelated nature of the challenges facing the global economy.“To avoid potential crises and boost growth and productivity, more co-ordinated international action is urgently needed”, she said. More

US consumer prices rose more than forecast in June, hitting an annual pace of 9.1 per cent, a fresh 40-year high that cements expectations the Federal Reserve will deliver another historically large interest rate increase this month.The consumer price index published by the Bureau of Labor Statistics on Wednesday further accelerated in June, above economists’ estimates for an 8.8 per cent increase. It marked the fastest year-over-year increase since November 1981.Between May and June, prices jumped another 1.3 per cent, following a 1 per cent rise in May. Once volatile items like food and energy are stripped out, “core” inflation increased 0.7 per cent, compared with May’s 0.6 per cent advance. That translated to an annual increase of 5.9 per cent, roughly in line with the 6 per cent pace reported the month earlier.The data will spur the US central bank’s efforts to restore price stability, which dramatically intensified last month after officials abandoned previously-laid plans to deliver a half-point rate rise and instead implemented the first 0.75 percentage point increase since 1994. Policymakers have also signalled their intent to raise rates to a level — estimated to be around 3.5 per cent — that begins to restrain economic activity by the end of the year and maintain an aggressive approach to tightening monetary policy until there is evidence that monthly inflation readings are decelerating towards a pace more consistent with the Fed’s 2 per cent target.

The Biden administration, whose popularity has plummeted against the backdrop of soaring inflation, this week sought to get ahead of June’s high figure and played down the acceleration, emphasising that the data covered a period prior to a sharp drop in prices for energy and other commodities.Brent crude, the international oil benchmark which had climbed to almost $140 a barrel in early March following Russia’s invasion of Ukraine, this week slumped below $100 a barrel. Food prices globally have also moderated from historic highs.On Tuesday afternoon, a fake version of the June report circulated online falsely stating that prices had risen at an annual rate of 10.2 per cent, forcing the Bureau of Labor Statistics to publicly discredit it.Should the Fed raise rates by another three quarters of a percentage point at its July meeting, as expected, the target range of the federal funds rate will rise to 2.25 to 2.50 per cent. Alongside these actions, which include shrinking its $9tn balance sheet, the Fed has stepped up its rhetoric about not only its “unconditional” commitment to lowering inflation, but also what it is willing to risk in terms of the economic recovery to do so. While labour demand has remained extremely strong, with another 372,000 jobs created last month alone, economists fear that momentum will soon ease as the US economy hurtles towards a recession at some point next year. The Fed has already begun to acknowledge unemployment will need to rise, with officials most recently forecasting joblessness to inch up from the current historically low level of 3.6 per cent to just above 4 per cent by the end of 2024. Many economists believe a more accurate estimate is in the vicinity of 5 per cent, translating to significantly more job losses. More

JAKARTA (Reuters) – G20 finance leaders will meet in Bali this week for talks on issues like global food security and soaring inflation, but there was scepticism from Germany and France over Indonesia’s hopes for common ground as tensions over Ukraine simmer.Russia’s invasion of Ukraine overshadowed a meeting of foreign ministers from the Group of 20 major economies last week, as Russia’s top diplomat walked out of a meeting and accused the West of “frenzied criticism”.And at the most recent G20 finance leaders’ meeting in Washington in April, officials from some Western nations left the room when it was the Russian representative’s turn to speak.Germany is expecting more open and direct discussions with Russia this time around, government sources said in Berlin on Wednesday.”Most will want to adopt a different approach on the day, after April,” one of the sources added.But the source put a damper on hopes of agreement on a joint communique following the talks, sought by host Indonesia, saying Russia and China were expected to band together amid tensions with the West over the Ukraine war.A French Finance Ministry source also said the G20 ministers were unlikely to agree on all issues for a communique, with the economic consequences of the war particularly disputed.”The question is whether we have a separate declaration from the presidency which denounces the Russian invasion of Ukraine and details the economic risks of the consequences and then a part of the communique, a roadmap, that covers the G20’s current work,” the French source said.”The G20’s capacity to act and communicate is very strongly hindered by the war in Ukraine which one of the G20 members is fully responsible for,” the source added.Indonesia hopes to issue a communique – which the April meeting failed to do – when talks wrap up on Saturday, though its central bank governor said if that was not feasible the outcomes would be summarised in a chair’s statement.”We hope for the best, but of course prepare for the worst,” said Indonesia’s central bank governor Perry Warjiyo.”I don’t want to speculate, we are still trying very hard to reach a communique,” he said in an interview last week.Indonesian officials have noted disagreements between Western countries and Russia on how to word a draft communique to describe the state of the global economy and how it is being affected by the war in Ukraine, which Moscow calls a “special military operation”.U.S. Treasury Secretary Janet Yellen and Japanese Finance Minister Shunichi Suzuki, after a bilateral meeting in Tokyo on Tuesday, blamed the war for volatility in currency markets and for increasing the risk of global recession.Yellen and Suzuki are due to attend the Bali meeting in person. Indonesia has said Russian Finance Minister Anton Siluanov will address the meeting virtually, with his deputy travelling to Bali. Ukraine’s finance minister has also been invited and is due to attend one session virtually.Putting aside issues related to the war, Warjiyo said the G20 had made substantial progress on topics like regulatory principles on crypto and central bank digital currencies.Indonesia’s G20 deputy for finance, Wempi Saputra, said the group will try to come up with actions to help poor countries tackle a looming food crisis, by ensuring supply and affordability of food and fertilisers.Other topics on the agenda include the setting up of a fund under the World Bank to better prepare for future pandemics and a Resilience and Sustainability Trust at the International Monetary Fund that could be accessed by countries in need of funds, as well as debt relief for poor countries.Yellen urged China and other non-Paris Club creditors to cooperate “constructively” in helping low-income countries facing debt distress, saying Beijing’s lack of cooperation has been “quite frustrating”.Indonesia’s Wempi said a multinational signing of a global tax agreement, initially scheduled on the sideline of meetings, has been pushed back. The Organisation for Economic Cooperation and Development has set a new target for the major tax overhaul to take effect in 2024, instead of 2023. More

There’s a counsel of doom which has been emerging for a few years and has now been given extra vim by the war in Ukraine. It contends that the post-cold war surge of globalisation which stitched together the advanced and developing economies had a good run, but that the patchwork, increasingly stretched by geopolitical rivalries, is now coming apart into two or three pieces.Specifically, the argument says, the “splinternet” is breaking the online world into competing digital spheres, partly thanks to three incompatible models of handling data — European privacy-focused regulation, US corporate-driven free-for-all and Chinese state surveillance. Meanwhile, it goes on, political risk from the US-China strategic conflict is causing companies to reshore or “friendshore” supply chains. Governments, especially since the Russian invasion of Ukraine, are faced with the task of picking economic and strategic sides: either the US-led advanced economies (sometimes with the EU as a somewhat independent pole of alliance) or China.Nice narrative, but there’s not much evidence to support it. Not only are most standard measures of globalisation — cross-border movement of goods, services, capital, data and people — doing pretty well, but governments are showing that shrewd multipedal manoeuvring can keep their feet in more than one camp.Take data protection and the alleged fracturing of the digital realm. The EU is convinced it’s setting data rules for the world, exporting the General Data Protection Regulation (GDPR) through the familiar “Brussels Effect”, explicitly contrasting it with US laxity. But a country like Japan under the late Shinzo Abe, by carefully designing safeguards against misuse of personal information, got Brussels to recognise its data protection regime as adequate for data transfer while enthusiastically signing up to US-inspired commitments to free international data flow.The same is true with goods supply chains. In Brazil, President Jair Bolsonaro values trade with Europe enough to expend considerable effort trying to push through the EU-Mercosur trade deal, attempting (not very convincingly) to acknowledge European environmentalist values regarding the Amazon. At the same time, China buys about three quarters of Brazilian soyabean exports and Bolsonaro is keen not to offend Beijing.A diplomatic balancing act prevents Brazil from having to choose. Brazil voted for the motion to condemn Russia’s invasion of Ukraine at the UN general assembly, but Bolsonaro made a point of signalling disquiet, and then abstained on the subsequent vote to suspend Russia from the UN human rights council. (Brazil also continues to enjoy the support of the US in its ambition to join the OECD, a rich-country club.)One of the other emerging market heavyweights, India, seems at first sight to be shifting towards the advanced economies’ camp as its foreign policy relations with China worsen. It has recently signed trade deals with Australia and the UK and is negotiating one with the EU, alongside enhanced military co-operation with the US. But those deals don’t have nearly enough substance to lock India into a decisive trading relationship. And good luck trying to stop Indian prime minister Narendra Modi buying oil from Russia, one of the US-led alliance’s key strategic goals with regard to Ukraine. Like Bolsonaro, Modi is playing a multipolar diplomatic game and so far succeeding.Many emerging markets are doing similar. Plenty of countries in East Asia aren’t big fans of China and some, such as Vietnam, are picking up good business from multinationals diversifying away from the Chinese economy. But Vietnam’s trading economy is still tied to Asia-Pacific networks in which China is present, reinforced by the Beijing-dominated Regional Comprehensive Economic Partnership.During the cold war, developing countries could plump for one side or the other and get broad-spectrum alliance benefits: military protection and assistance, political aid, maybe some useful trade links. Even then, though, there was a large non-aligned movement. And none of today’s big players has such a comprehensive offer.The US has control of the global dollar payments system and the biggest military on earth. But the current phobia of trade deals in Washington limits its ability to reward allies with juicy market access, evidenced by the feebleness of the Indo-Pacific Economic Framework being offered in Asia.The EU’s a better bet for a meaningful trade deal, assuming you don’t mind it hedged around with increasingly restrictive rules on the environment and labour rights. But it has little unified military capability to underpin a strategic alliance.China is a big commodities export market, the source of key industrial inputs like rare earths and a provider of infrastructure through the Belt and Road Initiative — assuming you consider that a bonus. But the renminbi isn’t an internationalised currency, and Beijing’s belligerent foreign policy alarms countries in the region.So far, the fabric of globalisation has proved so densely woven it has resisted attempts at unravelling. Of course, the political divisions between the big trading powers, particularly the US and China, are a constant worry. If tensions over Russia — or Taiwan — escalate, that threat will become acute. But so far, none of those powers have shown themselves strong enough to force countries to choose an exclusive bloc. This is not the cold war. It’s far more interesting than [email protected] up to the Trade Secrets newsletter, weekly on Mondays More