IMF Cuts Global Growth Forecast Amid Supply Chain Disruptions, Pandemic Pressures

The IMF, a grouping made up of 190 member states, promotes international financial stability and monetary cooperation. It also acts as a lender of last resort for countries in financial crisis.

In the IMF’s latest World Economic Outlook report released on Tuesday, the group’s economists say the most important policy priority is to vaccinate sufficient numbers of people in every country to prevent dangerous mutations of the virus. He stressed the importance of meeting major economies’ pledges to provide vaccines and financial support for international vaccination efforts before new versions derail. “Policy choices have become more difficult … with limited scope,” IMF economists said in the report.

The IMF in its July report cut its global growth forecast for 2021 from 6% to 5.9%, a result of a reduction in its projection for advanced economies from 5.6% to 5.2%. The shortage mostly reflects problems with the global supply chain that causes a mismatch between supply and demand.

For emerging markets and developing economies, the outlook improved. Growth in these economies is pegged at 6.4% for 2021, higher than the 6.3% estimate in July. The strong performance of some commodity-exporting countries accelerated amid rising energy prices.

The group maintained its view that the global growth rate would be 4.9% in 2022.

In key economics, the growth outlook for the US was lowered by 0.1 percentage point to 6% this year, while the forecast for China was also cut by 0.1 percentage point to 8%. Several other major economies saw their outlook cut, including Germany, whose economy is now projected to grow 3.1% this year, down 0.5 percent from its July forecast. Japan’s outlook was down 0.4 per cent to 2.4%.

While the IMF believes that inflation will return to pre-pandemic levels by the middle of 2022, it also warns that the negative effects of inflation could be exacerbated if the pandemic-related supply-chain disruptions become more damaging and prolonged. become permanent over time. This may result in earlier tightening of monetary policy by central banks, leading to recovery back.

The IMF says that supply constraints, combined with stimulus-based consumer appetite for goods, have caused a sharp rise in consumer prices in the US, Germany and many other countries.

Food-price hikes have placed a particularly severe burden on households in poor countries. The IMF’s Food and Beverage Price Index rose 11.1% between February and August, with meat and coffee prices rising 30% and 29%, respectively.

The IMF now expects consumer-price inflation in advanced economies to reach 2.8% in 2021 and 2.3% in 2022, up from 2.4% and 2.1%, respectively, in its July report. Inflationary pressures are even greater in emerging and developing economies, with consumer prices rising 5.5% this year and 4.9% the following year.

Gita Gopinath, economic advisor and research director at the IMF, wrote, “While monetary policy can generally see through a temporary increase in inflation, central banks should be prepared to act swiftly if the risks to rising inflation expectations are high. become more important in this unchanged recovery.” Report.

While rising commodity prices have fueled some emerging and developing economies, many of the world’s poorest countries have been left behind, as they struggle to gain access to the vaccines needed to open their economies. More than 95% of people in low-income countries have not been vaccinated, in contrast to immunization rates of about 60% in wealthy countries.

IMF economists urged major economies to provide adequate liquidity and debt relief for poor countries with limited policy resources. “The alarming divergence in economic prospects remains a major concern across the country,” said Ms. Gopinath.

By: Yuka Hayashi

Yuka Hayashi covers trade and international economy from The Wall Street Journal’s Washington bureau. Previously, she wrote about financial regulation and elder protection. Before her move to Washington in 2015, she was a Journal correspondent in Japan covering regional security, economy and culture. She has also worked for Dow Jones Newswires and Reuters in New York and Tokyo. Follow her on Twitter @tokyowoods

Source: IMF Cuts Global Growth Forecast Amid Supply-Chain Disruptions, Pandemic Pressures – WSJ

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Trillions of Negative-Yielding Debt Redeem Europe’s Bond Bulls

A deep pool of debt with below-zero returns is increasingly betting on European bonds. In a matter of weeks, German 10-year bond yields fell to the most in July from flirting with zero for the first time in two years, going back to minus 0.46% since the start of 2020. That fall – which has propelled bond prices – has helped push negative-yield debt volumes in Europe to a near six-month high of 7.5 trillion euros ($8.9 trillion).

Traders were alerted by the inflation bet, which initially raised borrowing costs, but lost heights after major central banks insisted on continued support. At the same time, the spread of Covid-19 variants stoked demand for the safest government loans, reviving a business that dominated global markets last year amid the pandemic.

Strategists at HSBC Holdings plc and ABN AMRO Bank NV never shied away from their call for benchmark bond yields at minus 0.50% by the end of 2021, which has been in effect since the first half of last year. That will erase a large portion of this year’s 54-basis point trough-to-peak advance.

The European Central Bank said last month that current inflation is driven by temporary factors, and any change in stance would depend on hitting the new 2% inflation target.

HSBC’s forecast was “based on the assumption that there will be no rate hikes before the end of 2023,” said strategist Chris Atfield. “It is mostly market priced now, helped by the new ECB forward guidance.”

Money markets have quickly cut back on policy tightening after the ECB revised guidance on interest rates, saying it would not react immediately if price hikes exceed that target for a “transient” period.

According to swap contracts, in July, traders wiped out 20 basis points more from rate-increasing bets. This is the biggest decrease in nearly two years, and they suggest they expect the ECB deposit rate to be below zero in five years.

HSBC’s Attfield said that “the new forward guidance criteria for rate hikes since 2008 will not have been met at any point,” highlighting the challenging task facing the ECB as it seeks to open up record monetary stimulus.

The euro area pulled out of recession in the second quarter, and headline inflation climbed to 2.2% last month. According to Mayva Cousin of Businesshala Economics, while rising pressures could push the annual CPI rate to more than 3% in the coming months, the increase will prove to be temporary and inflation is expected to decline sharply in early 2022.

According to a Businesshala survey, strategists see the German 10-year yield as low as minus 0.14% by the end of the year, down from minus 0.035% nearly a month ago. ABN AMRO strategist Flortje Merten sees a drop to minus 0.5%, given the balance between rate expectations and the state of the euro-regional economy.

“Further rate hikes and more optimistic sentiment would be two opposing factors and could keep Bund yields around these low levels,” Merton said.

This week

  • The Bank of England will meet with investors on Thursday to discuss the possibility of a split vote on bond purchases, given recent sharp remarks by some members of the Monetary Policy Committee.
  • European sovereign supplies should remain moderate at around 17.5 billion euros, according to Commerzbank, with auctions in Germany, Austria, France and Spain.

Source: Trillions of Negative-Yielding Debt Redeem Europe’s Bond Bulls

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Critics:

Historically, people give the government their money, instead of spending it, with the promise of being paid back, with interest. Now, governments are essentially getting paid to borrow money, as people become increasingly desperate for a safe haven for their wealth. The cycle becomes self fulfilling as negative rates raise further concerns about the economy.

“Bonds are supposed to pay the owner of capital something to pry the money out of their hands. But no … ” said co-founder of DataTrek, Nicholas Colas. Central banks often lower interest rates to grow the money supply in the economy, fuel demand and provide growth momentum. Other key drivers for monetary policy easing are weakening domestic outlooks, falling annual growth rates, low inflation and weakening business and consumer confidence. And in Europe’s case, make up for the lack of a coordinated fiscal response.

Another reason for negative yielding debt worldwide could be that institutional investors, like pension funds, are forced to keep buying bonds because of liquidity requirements. PIMCO’s global economic advisor Joachin Fels said there are also secular factors like demographics and technology that drive rates lower.

“Rising life expectancy increases desired saving while new technologies are capital-saving and are becoming cheaper – and thus reduce ex ante demand for investment. The resulting savings glut tends to push the “natural” rate of interest lower and lower,” said Fels.

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