IMF World Economic Outlook for 2022 and beyond

The world economy is facing a series of crises. The war in Ukraine has pushed energy prices higher at a time when inflation was already squeezing household incomes and corporate spending plans. While some countries have managed to buck the trend, these factors are weighing significantly on global growth. In October, this prompted the IMF to revise its World Economic Outlook (IMF WEO) lower for 2022 and beyond. How bad do they think it’s going to get?

In the short-term, it’s a grim picture. Global growth is forecast to slow from 6% in 2021 to 3.2% in 2022 and 2.7% in 2023. The IMF WEO labelled this “the weakest growth profile since 2001 except for the global financial crisis and the acute phase of the Covid-19 pandemic”. The IMF inflation forecast is for an increase from 4.7% in 2021 to 8.8% in 2022 before dropping back to 6.5% in 2023 and 4.1% by 2024.

It's clear that the worst may still be to come, as interest rates rise to curb inflationary pressures. Most economists are forecasting recession in the year ahead. For example, in the US. Oxford Economics sees a .

Where the US leads, other major markets are likely to follow – the Bank of England has said that the UK will face a ‘very challenging’ two-year slump. It’s likely to be the longest since records began in the 1920s, with unemployment rising to 6.4%. The Eurozone is in a similar position, with over half the countries in the bloc heading for recession, according to the IMF.

While most of the world’s major economies face a toxic combination of higher inflation, higher interest rates and rising unemployment, it is not universal. Countries such as India have only experienced relatively mild inflation, largely imported in the form of oil prices. India is set to grow at 6.8% in 2022. A number of emerging market countries are benefiting from rising commodity prices – including the Middle East and parts of Latin America.

China has been the topic of fevered debate. While it is not subject to the same inflationary pressures as Western economies and is at a different point in its interest rate cycle (the Chinese central bank is loosening rather than tightening monetary policy), it has different pressures. Its economy has been hurt by the country’s zero Covid policy and continued lockdowns in major cities. Geopolitical tensions with the US have also dented growth. It has become increasingly clear that the US will no longer be a fertile market for cheap Chinese goods or share its technology as freely. This has pushed forecast growth for China to just 3.2% in 2022, down from 8.1% in 2021.

This may happen sooner than expected. John Maynard Keynes once said: “the inevitable never happens and the unexpected constantly occurs”. Today, when all the signs are negative and the prevailing mood is gloomy, surprises may be to the upside.

Markets would welcome a sign that inflation has peaked, particularly in the US. Weakening inflationary pressures would allow the Federal Reserve to relax its stance on interest rates, raising rates less quickly than before. Key to this will be US employment statistics: at the time of writing, employment is strong, with the US economy still adding jobs, but there are tentative signs that jobs growth is weakening. 

It is possible that markets are at or near the bottom already. History suggests that the low point in markets often comes significantly ahead of the bottom of the economic cycle – during the pandemic, for example, markets started to recover long before there was a vaccine in prospect. During the global financial crisis, markets started to rise when the economy was at its weakest point and there was no economic recovery in sight.

It may not be obvious until after the event. Either way, it could bring about a significant shift in markets. Markets have been minutely focused on interest rates, which has been bad news for any company with high debt, or where its valuation is sensitive to changes in the risk-free rate (such as technology companies). This has favoured ‘value’ areas and disadvantaged ‘growth’ areas.

If the environment were to turn, and expectations shifted from rising interest rates to falling interest rates, this could see a significant shift in sentiment. Investors may start to prize growth areas once again. The Dollar would be another area to watch. It has been extremely strong as the Federal Reserve has raised rates, and investors have sought a ‘safe haven’. However, this could also start to weaken if the environment shifts.

It would be premature to call the end of this period of weakness yet. Markets still have some bad news to digest in the form of weaker earnings and economic difficulties. However, a lot of bad news is priced into markets and there may be better times ahead in 2023.

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