Macro Insights: The gathering global economic storm clouds

THREADING NEEDLE: International Monetary Fund (IMF) published its latest global economic deep-dive. It’s a sobering picture of slowing growth, with many downside risks now reality, and worse to come. The only good news is global inflation peaked at 9.5% and is seen near halving by the end of next year, whilst a recession is not quite inevitable. Markets are not economies, but they do rhyme. Falling price pressures may allow an ease back on big interest rate hikes, and hence valuations. This could give markets relief even as economic growth and earnings fall.

ECONOMIC OUTLOOK: The IMF is now forecasting global GDP growth to fall back further, to 2.7% next year. Economic weakness is focused in the UK, Europe, and North America (see chart). China is the only major economy seen accelerating next year, and Asia remains the bulwark to the threat of global recession. But even these reduced forecasts may be too bullish, reliant on sharply lower inflation and oil prices and no further ‘black swans’ events as interest rates rise more. Some assumptions are already out-of-date, after Russia’s cut off of all EU gas.

FINANCIAL STABILITY: The IMF’s separate financial stability report shows risks higher, and more bad surprises likely. The risk list is long. A disorderly tightening of financial conditions, with poor market liquidity as a shock amplifier. The resilient corporate sector not immune to a turning credit cycle and leverage finance pressures. Some housing markets at a tipping point. China’s property slowdown could spread to the banking sector. Plenty of the prior downside risks have become reality, from stubborn inflation, to China covid lockdowns, and Ukraine war spill overs. 

All data, figures & charts are valid as of 12/10/2022