The IMF has cut its forecast for global growth and expects a slowdown from 6.1% in 2021 to 3.6% in both 2022 and 2023 and its medium-term target has been cut to 3.3%. Revisions are possible to the downside. Reasons given for the latest cut to the growth forecast include the effects of the Ukraine/Russia conflict where both economies are expected to decline and in addition will have a knock-on effect on trading partners, the effects on the Chinese economy of their zero-COVID policy and the consequential effects on global supply chains and the risk of social unrest because of rising food and fuel prices.
Prices have surged around the world. Initially the increases were related to supply chain bottlenecks following COVID restrictions, then rising energy prices which were later further impacted by the conflict between Russia and Ukraine. This also saw upward pressure on food prices. However, while inflation was earlier seen as being of a transient nature, it spread to most commodities and became more generalized with wage demands increasing. Many economists believe that inflation will slowly start declining in the next few months, but there is little evidence yet to support this view. Prices are rising by 9.1% a year in the UK - the highest rate for 40 years. The Bank of England has warned inflation might reach 11% within months, as the prices of fuel, energy and food put pressure on household budgets. US inflation also rose in June to 9.1%, again the highest rate in more than 40 years. Sri Lanka inflation rose to 54.6% from an annual 5.7% a year ago, contributing to social unrest, a warning for other countries facing similar issues.
Major Central Banks around the world have applied Quantitative Easing (QE) from 2009. Since the onset of the COVID pandemic, interest rates were artificially pushed to record low levels and additional large scale asset buying programs were introduced to support economies. The Fed in the USA has started the reversal of QE, switching to Quantitative Tightening (QT), with a massive $9 trillion balance sheet as a base. We expect to see rising interest rates across most major economies, as well as reversal of the large asset buying programs. While the consequences for markets of this tightening phase is uncertain, the risks are high that this phase may be negative for markets.
The S&P 500 rose strongly by 279.0% over the 10 years to December 2021, but then fell by 20.6%% in the first half of 2022. Technically this is a bear market. The tech heavy Nasdaq rose an even more impressive 500.5% over the 10-year period but collapsed by 29.6% over the last quarter. Some analysts are questioning whether a combination of slowing economic growth and tightening monetary policy as well as rising global tension could result in further major stock market corrections. The US 10-year bond yield rose from 0.92% at the start of 2021 to 1.49% at the close of 2021 and rose further to 3.02% at the end of June 2022. The Fed Fund rate has increased from almost zero at the beginning of this year to 1.5% currently and is projected to reach 3.5% at the end of the year.
Click here to access the full report