Markets love good news. Even when that’s news they basically decide to think of as good. A typical example is the “rally” that followed the FED’s announcement that this time it increased the key interest rates by 0.25% and not by 0.50% which was the “step” of the previous increases. That is, a rise in interest rates, in itself a negative development, was viewed positively because it was smaller than expected and because it opened up a prospect of stopping the sustained rise in interest rates. And this despite the Fed making it clear that it will continue to raise interest rates until it considers rising inflation has been dealt with.
Accordingly, it is interesting how the announcement by the IMF of revised forecasts for growth in 2023 was treated. Specifically, the correction concerns the forecast for global growth of 2.9% in 2023, a correction of 0.2% compared to the previous forecast. And this was hailed as cause for optimism. But to a large extent this is due to an estimate of higher growth in China and the forecast for strong growth in India anyway, and less to the dynamics in the developed countries.
The contradictory dynamics
A closer reading of the IMF forecasts themselves shows why optimism should be measured.
First, there is a wide gap between the 2023 forecast for developed economies (1.2%) and emerging markets and developing economies (4%).
Then in the developed economies the growth rates appear rather sluggish. For the US it is 1.4% and for the Eurozone just 0.7%, with Germany at 0.1%, just a breath away from recession. A recession that, according to the IMF, Great Britain will not avoid in 2023 (0.6%).
On the contrary, the 5.2% forecast for China in particular reflects the integration of the lifting of restrictive measures for the pandemic and the clearly greater dynamism of the Chinese economy.
At the same time, even the IMF is not sure that in 2024 there will be a great growth potential. It forecasts global growth at 3.1%, with US growth slowing to 1% and the Eurozone doing slightly better.
Accordingly, it is interesting that Eurostat’s recent estimate of GDP in the EU shows that GDP remained flat (zero growth) in the EU as a whole in the last quarter and in the Eurozone rose by 0.1%, again compared to the previous quarter. On an annual basis (comparison with the corresponding quarter of the same year) it was 1.8% for the EU and 1.9% for the Eurozone. In fact, it is possible that if there was not the +3.5% in Ireland in relation to the previous quarter and 15.7% in relation to the corresponding quarter of the previous year (which of course, like the overall GDP of Ireland, also has to do with the multinationals based there because of low taxation), the result would be stagnation. Nor is it without significance that Germany, Italy and Sweden recorded a decline in GDP compared to the previous quarter.
In the US it has now been announced that growth in the last quarter of 2022 was 2.9% on an annual basis. However, this is an indicator used by the US, for seasonally adjusted year-on-year increases/decreases which is different from the “simple” quarter GDP indicator compared to the GDP of the corresponding quarter of the previous year where the increase falls to 1%.
How much is inflation falling?
Another critical question concerns inflation. It is true that recently there has been a de-escalation of inflation in several economies, without speaking of a retreat to the levels before the current increase. In addition, we must not forget that even if inflation subsides a little, it does not cease to mean that we have price increases, with all the social effects that these have, especially on the popular strata.
A careful look will show that overall inflation may be falling, but not at the same pace as “structural inflation”. Structural inflation does not include food and fuel prices, which at the time of the war in Ukraine were strongly affected by extra-economic factors, and is more indicative of the real trend.
In the US headline inflation peaked at 9% in June 2022 and fell to 6.5% in December. But headline inflation hasn’t followed the same trend: it peaked in September 2022 at 6.7%, and by December it had fallen year-on-year to just 5.5%, and has actually hovered around 6% over the past 12 months.
The limits of the movements of central banks
Inflation data show that the decline in headline inflation has less to do with central bank interventions and more to do with factors such as developments in the fuel market. Conversely, the persistence of structural inflation also shows that interest rate hikes have so far not delivered as expected. But at the same time increases in key interest rates have real effects on the economy because they increase the cost of borrowing for households and businesses.
This was also admitted by the European Central Bank, which announced that lending criteria have become tighter in all loan categories and that demand for business loans and mortgages has not declined, due to the increase in interest rates. But all this points much more to a negative dynamic overall in the European economy. And of course, such a negative dynamic where both households and businesses become more cautious in the end will also lead to a decline in structural inflation, but at the price of recession and possibly an increase in unemployment, while we will still have higher inflation rates from what we had before the pandemic.
The deepest embarrassment
All of this points to a deeper embarrassment in the global economy, especially in developed economies, that cannot be masked behind reflexive “celebrations” for any statistical data that does not point to a clear recession.
Embarrassment about the way the world is becoming more divided, more conflicted and with hotbeds of geopolitical tension with greater impact on the global economy, the way the productivity cuts that would set the tone for the transition are absent in developed economies in particular. in a new era, in the way that inflation has re-emerged (which was not only due to exogenous factors) but also in the way that tools that were once considered irreplaceable – such as interest rate hikes – are not performing as promised by the theoretical schemes that support them , while they also have negative effects.
