Lower Growth and Higher Inflation ...
In January this year, the IMF were forecasting world growth of 4.4% in 2022. This was a modest slow down from growth of around 6.0% in the prior year.
Growth in the U.S. and Europe was expected to be around 4.0%. Growth in the UK and China was expected to be about 4.5%. Concerns were expressed around Covid continuance, energy price rises, supply side disruptions, transport costs, tight labour markets and higher inflation.
"Risks to the global baseline are tilted to the downside". The IMF stated. "The probability of a major natural disaster remains elevated".
Then in March, Russia invaded Ukraine. Sanctions were imposed on Russia. The ruble collapsed by 30%. Domestic interest rates were hiked to 20%. Capital controls were imposed. The Iron Curtain was redrawn albeit with a gas leak for now. The concept of Cold War returned. Moscow placed on ICE, a policy of Isolation, Containment and Exclusion in prospect.
So What Now of World Growth?
In our Friday Forward Guidance this week, we outline the new monetary framework for the West. On Monday we will confirm our outlook for markets. Higher rates will lead to lower growth, achieving little impact on inflation in the short term. Bond yields are rising, pension deficits will be shrinking. The prospects for equities now positive, following the sell offs in Asia, North America and Europe.
The Economist Intelligence Unit suggested this month, the impact of the war will be a loss of some $400 billion dollars this year. That equates to a loss of 0.4% of GDP. The downside, however, could be as much as a full one percentage point or $1 trillion dollars.
"The economic impact of the conflict will be felt mostly in Ukraine and Russia. Both will experience sharp recessions this year. Those eastern European countries most exposed to trade with Russia, such as Lithuania and Latvia, will also take a hit from the conflict. Elsewhere in Europe, the EU will suffer from an energy, supply-chain and trade shock."
Oxford Economics suggests the impact on global GDP will be muted in Asia and North America. The impact will be greater in Russia and Europe. The loss of global output this year is expected to be 0.6% in 2022 and 1.1% in 2023.
NIESR are more bearish. Using NIGEM, the global econometric model, NIESR suggests the impact of the war in Ukraine could reduce the level of Global GDP by 1%. That's about $1 trillion dollars. The conflict would also add some 3% to global inflation this year and 2% next.
Country Forecasts
Our own simulations suggest world growth will be 3.5% this year. This is based on changes to the January IMF outlook as follows. U.S. growth is downgraded to 3%, slightly above the FOMC forecast this week of 2.8%.
In China, the IMF forecast of 4.8% is upgraded to 5.0%. This is a slight discount to the official growth target of 5.5% in the current year. Covid restrictions and lock downs in Shenzen and Jilin could impact further on the full year outlook.
In Europe, Germany will be the most severely affected. The overall shock to growth is expected to be between 0.5% and 1.0%. We will update our UK forecasts in greater detail next week. The IMF were forecasting UK growth of 4.7% this year following growth of 7.5% last year. This month, the HM Treasury summary of forecasts for the UK economy, suggested growth would slow to around 4% this year. It would appear to be a fair bet for the moment. We await with interest the OBR updates next week.
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