The global economy has been engulfed by multiple and overlapping shocks on a scale that draws few parallels in human history. Russia’s war in Ukraine combined with surging energy and food prices, a sharper-than-expected slowdown in China and the lingering after-effects of the pandemic have created a perfect economic storm, one that is likely to pitch more than a third of the global economy into recession, the International Monetary Fund (IMF) warns in its latest economic outlook report.
It also warns that “decades of procrastination” means the world is running out of time “to avert catastrophic climate disruptions”. It makes for grim reading.
The IMF also published its latest global financial stability report, which talks about a potential “disorderly repricing” in markets. We’ve already seen significant turbulence in UK markets attached to the government’s controversial tax plan. “It’s difficult to think of a time where uncertainty was so high,” said Tobias Adrian, director of the IMF’s Monetary and Capital Markets department.
The IMF’s latest assessment notes that central banks were getting “mixed economic readings” from their respective economies.
“A deteriorating growth outlook with subdued consumer and investor sentiment sits somewhat awkwardly alongside still-tight labour markets,” it says. In other words, while output and growth is faltering, employment is still growing, a seemingly contradictory phenomenon.
There is also a risk of inflation expectations becoming de-anchored, the IMF warns. Price dynamics are complex but the fear is that we could have what economists call “second round effects” effectively when companies and workers try to insulate themselves by raising prices or wage demands. Short-term economic news affects long-term inflation expectations. At the moment, the IMF says there is little sign of this.
Another risk factor, predicated on mixed economic signals, is whether central banks lift interest rates too much or too little.
“The risk of policy mistakes — under or over-tightening — is elevated in these conditions,” it says. Not tightening enough risks causing inflation to become entrenched, “prompting a more hawkish future stance on interest rates at a significant cost to output and employment” it warns.
Conversely, over-tightening risks “sinking many economies into prolonged recession”. Although it notes the latter — lifting interest rates by too much — is the least worst mistake.
You can see the various velocities central banks are travelling at from the fast-paced Bank of Canada to the slightly slower US Federal Reserve and Bank of England and then to the European Central Bank, which tends to be less reactive than others.
“Given the uncertain outlook, the coming months are likely to test central banks’ mettle in rooting out inflation,” it says.
Significantly for Ireland, the IMF also highlights the potential impact of higher interest rates on real estate markets.
“As central banks aggressively tighten monetary policy, soaring borrowing costs and tighter lending standards, coupled with stretched valuations after years of rising prices, could adversely affect housing markets,” it says.
“In a worst-case scenario, real house price declines could be significant, driven by affordability pressures and deteriorating economic prospects,” it says. The industry here is still predicting a soft landing for house prices.
