Two key questions to weather inflation and protect yourself
The IMF recently released a pessimistic report on global economic forecasts.
Their April edition was already grim, but as current affairs unfolded, the IMF lowered its baseline forecast.
You can read the full report here.
The IMF has several scenarios and predictions about what to expect next, but the future remains highly unpredictable.
Two important questions arise when considering what to expect next.
- The rate of increase in the inflation rate and the cost required to reduce the inflation rate (increase interest rates)
- How much will the economy shrink if interest rates rise?
Let’s take a look at what the IMF predicts for the global economy and what we can expect in the future.
Key forecasts for the global economy.
The global economy is expected to grow more slowly than previous projections, giving priority to negative risks. These include soaring food prices, oil prices, and interest rates in an atmosphere of financial market turmoil due to inflationary pressures.
- Growth was projected to slow to 3.2% in 2022 from 6.1% last year, 0.4 percentage points lower than reported in the April edition of the World Economic Outlook.
- Global inflation is rising due to food and energy prices and ongoing supply and demand issues. This year, it is expected to be 6.6% in developed countries and 9.5% in developing countries. These figures have been revised upward from previous estimates by 0.9 and 0.8 percentage points, respectively.
- Due to disinflationary monetary policy, the global economy is expected to grow by only 2.9% in 2023.
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Factors behind the pessimistic global economic situation
- Global economic slowdown: The global economic slowdown has reduced business activity. This is exacerbated by political instability and conflict.
- Global Trade: This is another reason why the global economy is in trouble. After 2022, trade volumes will continue to decline. This trend started in 2019 due to the US-China trade war.
- Global Interest Rates: Less money is circulating within borders. The result is a demand for more capital than the available supply. Therefore, interest rates rise. However, this may not be enough for some businesses that need access to credit so they can continue to operate without going bankrupt.
- Global Inflation: Interest rates are skyrocketing as economic growth continues to stagnate in both developed and developing countries. This is largely due to the weakening of most central bank currencies against foreign currencies such as the United States Dollar (USD) using monetary policy tools such as raising interest rates and devaluing their own currencies. There is a possibility.
- China’s economic slowdown: In addition, China’s economy will slow significantly from 2022 onwards due to the ongoing trade war with the United States and challenges such as COVID-19, declining productivity levels, rising debt levels, and a crash in the property market. slowing down.
- Global Unemployment Rate: The global unemployment rate will rise to a record high of 7.8% in 2022. This may be largely due to job losses due to CoVID and increased participation in the workforce of young people who were previously ignored. For work. The US paints a different picture, but global unemployment has taken a hit.
- Russia — Ukraine War: The United States and the European Union (EU) have imposed economic sanctions on Russia. These sanctions have dramatically slowed economic growth in both countries and put pressure on their currencies. The overall results also impacted global markets, as Russia is a major exporter of petroleum products and Ukraine a major exporter of wheat.
- World Government Debt: Debt has risen to unprecedented levels in recent years. In 2022, the U.S. national debt was $20 trillion, or 104% of GDP. But developing countries are also rising to unprecedented levels. The Institute of International Finance reports that global debt will hit a record high of $303 trillion in 2021. According to the IMF, this represents his biggest one-year debt surge since World War II.
A country that thrives and a country that declines from the current economic situation.
Developing countries, especially Africa, have been hit hardest by the current economic climate. Inflation has become a major problem as the prices of essential commodities have risen. Their governments cannot cope with sudden spikes and volatility in financial markets. African countries have been dubbed ‘hunger hotspots’ and you can read more about them in our previous post.
Countries that are declining from their current economic situation are:
Russia and Ukraine. Russia has been hit hard by sanctions by Western countries such as Britain, France and Germany after Russian forces invaded Ukraine months ago.
On the other hand, some countries such as Iran, Iraq, United Arab Emirates and Middle East countries are thriving from the current economic situation. Oil-rich countries in the Middle East are seeing a significant surge in revenue. This is due to the low cost of production compared to other countries, and the growing global demand for oil has seen some significant gains.
Solution proposed by the IMF
The economy is cyclical. It will recover and stabilize, but only if we make the right decisions. According to the IMF, the economic crisis has several solutions.
First, tighten monetary policy to keep inflation under control. This means raising interest rates to ease inflationary pressures, ensure currency strength and give people confidence to save.
Second, it protects the most vulnerable segments of society by protecting low-income households from rising debt levels through social welfare programs such as unemployment insurance and food stamps.
This can help sustain spending during difficult times, prevent a full-blown recession or “fall” into a recession due to a lack of consumer purchasing power, and can have a significant impact on a company’s bottom line.
Third, governments should focus on boosting productivity to improve the economy’s growth potential. This requires devoting resources to infrastructure, education, and innovative work.
A strong economy can adapt quickly to change, innovate new technologies and services, and provide opportunities for citizens to create jobs and earn higher wages.
Finally, if governments want to create jobs, they should focus on creating jobs for those most likely to suffer unemployment. These include older workers, less skilled workers, and disabled workers.
The government does this by raising the minimum wage, allowing long-time unemployed people to retrain, investing in infrastructure projects, and offering tax incentives to companies that employ older workers. can be achieved.
Honestly, no one knows what will happen soon and whether the government will be able to implement the above measures.
But I think it boils down to two key questions.
- The rate of increase in the inflation rate and the cost required to reduce the inflation rate (increase interest rates)
- How much the economy will shrink if the economy raises interest rates (new capital lending or existing debt levels)
1. How sticky is inflation?
The market continues to rise as we have seen either lower inflation or negative MoM inflation. Wall Street’s consensus is that inflation will drop to his 2% and stay that way forever. The market has priced this scenario and we see a consistent trend of forecasts reaching this equilibrium.
But what if we are in another economy with a different nature? What if we continue to have 4-5% inflation next year? In that case, the Fed would have to raise interest rates further, creating a significant gap with the consensus estimate. Imagine how ugly the financial markets would be if this scenario continued.
2. Impact of rate hikes
A rate hike would have a devastating effect on current financial and bond markets, as well as the ability of new businesses and consumers to raise debt. In addition, there are some disturbing developments that indicate that rate hikes are already having an impact on the market.
2–1 Current consumer debt
According to the New York Fed, consumer credit (mortgages, credit card loans, student loans, etc.) is at unprecedented levels. Some of these debts are loaned at variable interest rates, increasing monthly payments as interest rates rise. .
This can lead to a consumer credit crisis with foreclosures and delinquencies. We are seeing an increase in delinquencies and foreclosures, albeit still at low levels. It is important to pay attention in the future.
2–2 New capital lending
A measure of housing affordability, or a measure of how well median-income families can afford to pay the mortgage on their home, has declined significantly.
The construction industry is showing signs of decline as the price of new homes remains sluggish. China’s property market has crashed, with devastating effects on both the economy and lives.
So while the market has been booming lately, we’re not out of the woods yet.
The IMF has warned that the global economy is going through tough times and things are likely to get worse before they get better. Although the exact extent of the damage is unknown, it is clear that the world still faces significant challenges.
Governments must act to protect the economy from further damage, and citizens must prepare for the difficult times ahead. We can only hope that the measures taken by governments and central banks will be enough to prevent a full-blown global recession.
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