Danger of $4 Trillion Hole in World Outlook Haunts IMF: Eco Week

(Bloomberg) – Global finance leaders will gather in Washington in the coming days with warnings of a possible $4 trillion loss in global economic output ringing in their ears.

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That’s the German hole in growth prospects through 2026 that International Monetary Fund chief Kristalina Georgieva identified as a looming risk last week.

She will host as central bankers, finance ministers and others deal with the aftermath of runaway inflation, aggressive monetary tightening, rising debt and the biggest ground war in Europe since World War II.

That the annual meetings of the IMF and World Bank are taking place entirely in person for the first time since the Covid-19 outbreak in early 2020 and show progress in managing the pandemic will be of limited consolation amid other headaches.

The current confluence of economic, climate and security crises makes it unlike anything global policymakers have seen since 1945. Yet certain elements, such as the chaos in emerging markets wrought by the Federal Reserve’s rate hikes in the early 1980s, tally with the present dilemma.

“The big question for the meetings is, ‘What are we going to do in terms of the institutional response to this, beyond business as usual,'” Masood Ahmed, president of the Washington-based Center for Global Development, said last week.

Here’s a quick look at some issues officials will grapple with:

  • World Economic Outlook: The IMF published this on Tuesday. Georgieva said last week that global growth forecast for 2023 will be lowered from 2.9%.

  • Ukraine: The country invaded by Vladimir Putin’s troops in February will remain in focus, from the impact of a depleted grain harvest to Russia’s gas pressure on Europe. The IMF Board on Friday approved a $1.3 billion loan for Ukraine, the first lending to the nation since early March.

  • Food Prices: The IMF Board last month approved a new “food shock window” for emergency financing to help nations hit by rising farm costs.

  • UK: The country remains vulnerable after market turmoil forced a partial reversal of a tax cut package by Prime Minister Liz Truss’ new government planned by the IMF.

  • The Fed: US tightening hurts other economies. IMF calculations show that 60% of low-income countries and a quarter of emerging markets are in or near a debt crisis.

  • Climate: The crisis is getting worse, as evidenced by recent disasters ranging from floods in Pakistan to a hurricane that hit Puerto Rico and Florida.

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Elsewhere this week, faster core inflation in the US, financial stability news in the UK, a rate hike in South Korea and the Nobel Prize in Economics will be among the highlights.

What Bloomberg Economics says:

“When foreign finance ministers and central bankers gather in Washington next week for meetings of the World Bank and IMF, many will argue that the rest of the world can’t afford any more rate hikes from the Fed.”

– Anna Wong, Andrew Husby and Eliza Winger. For a full analysis click here

Click here to see what happened last week and below is our look at what’s in store elsewhere in the global economy.

US economy

In the US, the consumer price index is the highlight of the coming week. Thursday’s Labor Department report will provide Fed officials with a snapshot of how inflationary pressures are unfolding after a series of huge rate hikes.

Economists estimate that September’s CPI rose 8.1% year-on-year, slowing from the previous month’s 8.3% annual rise as energy prices calmed. However, excluding fuel and food, the so-called core CPI is still accelerating – it is expected to rise 6.5% annually, up from 6.3% in August.

An increase in the core measure of this magnitude would represent the largest rise since 1982, highlighting stubborn inflation and fueling the pump for a fourth straight 75 basis point rate hike at the Fed’s November meeting.

Investors will hear from a number of US central bankers over the coming week, including Vice Chair Lael Brainard and regional Fed Chairs Loretta Mester, Charles Evans and James Bullard. Minutes of the Fed’s September meeting will be released on Wednesday.

Other data includes figures on prices paid to US producers. So-called wholesale inflation has shown signs of slowing as commodity prices ease amid concerns about a global economic slowdown.

The week will be capped by retail sales data. Economists are forecasting a modest monthly increase in September, helped by an increase in auto purchases. Without cars, the value of retail sales will fall for a second month. Since the figures are not adjusted for inflation, the data suggests that demand for goods has slowed in the third quarter.

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Bank of Korea Governor Rhee Chang-yong may turn to a small reversal in the scope of rate hikes. While it returned to the usual quarter-point move in August, many economists see it opting for a double-size move on Wednesday as rapid Fed tightening puts pressure on the won.

The Monetary Authority of Singapore is expected to hike interest rates for the fifth consecutive day, while the State Bank of Pakistan is expected to hold interest rates steady for a third.

Deputy Governor Luci Ellis may shed light on the Reserve Bank of Australia’s latest policy thinking following its pivot to smaller rate hikes.

Bank of Japan Governor Haruhiko Kuroda and Treasury Minister Shunichi Suzuki will be in Washington for IMF meetings, with yen movements still being closely monitored.

Europe, Middle East, Africa

The week begins with the announcement of the Nobel Prize in Economics on Monday. The prize was created by the Swedish Riksbank in 1968 and added a sixth category to the existing prizes for physics, chemistry, medicine, peace and literature. Three US-based academics won 2021 for their work using real-world experiments to revolutionize empirical research.

The Bank of England’s Fiscal Policy Committee will take center stage on Wednesday, a sure sign that the UK is facing significant problems.

The panel, which was responsible for emergency measures to prevent a spiraling bond market over the past month, will release minutes of its latest meeting. That could shed some light on whether officials see the risk of renewed turmoil, which has already plagued pension funds in the wake of Britain’s mini-budget. It can also address the impact of a sharp rise in mortgage rates.

BOE Gov. Andrew Bailey is one of several officials set to speak in the coming week, many of whom will appear at or near IMF meetings.

Similarly, several other officials from across Europe will be speaking in Washington or nearby. The President of the European Central Bank, Christine Lagarde, and Thomas Jordan, her counterpart at the Swiss National Bank, will both deliver speeches.

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In terms of European data, the UK will offer the most important news. Employment and growth reports could paint a fuller picture of how the UK economy is faring amid rising rates and high inflation.

Euro-zone industrial production is expected to have partially recovered on Wednesday in August, after a much larger decline in the previous month.

Inflation data will become more important in the rest of the region. In Hungary, the pace of price growth could hit nearly 20% on Tuesday, while Sweden’s key measure is expected to top 9% on Thursday. Israel and Egypt will also release inflation reports.

Further south, Ghana’s measure of price growth is expected to be more than triple the ceiling of the central bank’s 10% target for the third straight month.

Latin America

The week begins with the closely watched weekly Focus market expectations survey from the Central Bank of Brazil. Analysts have lowered their inflation forecasts for 2022 to 5.74% for 14 weeks in a row, while the GDP forecast for 2022 was raised to 2.7% during this period.

This increasingly optimistic view of Brazilian consumer prices is likely to be confirmed by data released on Tuesday: Analysts expect September price increases to ease for a third straight month, bringing the pace to just over 7% year-on-year – a full five percentage points below April 12, 13% peak.

With inflation in Chile nearing a three-decade high, the central bank is all but certain to continue a record tightening cycle, likely raising interest rates by 50 basis points to an all-time high of 11.25%. The bank next meets in December.

On Thursday, Mexico’s Banxico will release the minutes of its September 29 meeting, at which policymakers hiked interest rates to a record 9.25%. Many analysts are looking for another 125 to 175 basis points of tightening before officials say their job is done.

To wrap up the week, Argentina is expected on Friday to report full-year September inflation not far from the 83.45% reported by Turkey, the highest in the Group of 20. Analysts polled by Argentina’s central bank are looking for a year-end rate of 100.3%.

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