Oliver Mangan: Recession fears abating following sharp drop in commodity prices
Refilling gas storage supplies in Europe in the face of much lower Russian flows will be challenging ahead of next winter, writes Oliver Mangan
The title of the International Monetary Fund’s (IMF) recent World Economic Outlook Update sums up the current state of the global economy quite well. “Inflation Peaking amid Low Growth”.
For advanced economies, Consumer Price Index (CPI) rates are seen falling from an average 7.3% in 2022 to 4.6% in 2023 and to 2.6% in 2024. The process is already underway, with headline inflation in the eurozone declining to 8.5% in January from a peak of 10.6% in October, while the US CPI rate stood at 6.5% in December, down from 9.2% last June.
The recent further falls in energy and food commodity prices will see this trend continue. The UK, which has a heavy reliance on gas, will benefit in particular. Inflation is still very high in the UK at 10.5%. However, the Bank of England expects the CPI rate to fall sharply over the next year and is projected to end 2024 at 1.5%.
The IMF made slight upward adjustments to its global growth forecasts for 2022 and 2023, raising them by 0.2 percentage points for both years, reflecting stronger than expected performances by numerous economies in the second half of last year. In terms of the outlook, the IMF sees the world economy expanding by 2.9% in 2023 and 3.1% in 2024.
Thus, no global recession, but these growth rates are well below the historical norm. The world economy averaged growth of 3.8% in the period from 2000 to 2019, so it points to a period of weak activity ahead. Moreover, growth in advanced economies is projected to be particularly subdued, averaging just 1.2% in 2023 and 1.4% in 2024.
However, this could be viewed as a relatively positive outcome given the scale of the shock inflicted on a world economy that was just recovering from a global pandemic. Real household incomes have taken a hammering from the surge in inflation to circa double-digit levels, while the rise in interest rates will now be of the order of between 400 to 500 basis points in most Western economies.
Perhaps the most important change in the recent IMF update, though, was in its assessment of the balance of risks facing the world economy. While the risks remain tilted to the downside, the IMF says adverse risks have moderated since its previous update in October.
The European Central Bank, at its policy meeting last week, also commented the risks to the economic outlook have become more balanced, with the Bank of England also making a similar observation.
In particular, fears of a recession are abating in most economies on the back of the sharp decline in commodity prices over the past few months.
Risks remain, though. The IMF notes an escalation of the war in Ukraine remains a major source of vulnerability, particularly for Europe and lower-income countries.
Refilling gas storage supplies in Europe in the face of much lower Russian flows will be challenging ahead of next winter. Meanwhile, core inflation could prove sticky, especially if the tightness in labour markets continues to exert upward pressures on wages.
This is a clear concern at present for central banks and would necessitate interest rates being even higher for longer.
We have not yet seen the full effects either of the sharp tightening of monetary policy over the past year, with capacity also for serious debt distress problems in low-income and emerging economies. Thus, dark clouds still loiter amid some early rays of spring sunshine.
- Oliver Mangan is chief economist with AIB
