The newly released update by the International Monetary Fund (IMF) on its world economic outlook carries a warning in big, bold letters of more gloom and uncertainty this year and next as higher-than-expected inflation persists for the global economy.
The IMF has lowered its growth projection to 3.2 percent this year, off by 0.4 percent from its April forecast, after revising downward the economic performances of the US, China, and Europe while pushing upward global inflation estimates resulting from high food and energy prices.
A good number of real risks abound: 1) Russia stops all of its gas exports to Europe. 2) Tighter than expected labor markets. 3) Unanchoring of inflation expectations. 4) Debt distress in emerging market and developing economies (EMDE) arising from tighter global financial conditions. 5) Further suppressed Chinese growth. And, 6) Impeded global trade and cooperation from geopolitical fragmentation.
Should these risks materialize and cause inflation to rise further, IMF warns that global growth this year could even be lower at 2.6 percent, and in 2023 at two percent. This would put world growth in the bottom 10 percent of outcomes since 1970, the IMF added.
The IMF global economic update only reinforces an earlier report released by the World Bank where it estimated global growth to slump to 2.9 percent this year from 4.1 percent, as earlier stated in its report issued last January. Global growth in 2021 was at 5.7 percent.
Warning signs
These warnings should serve as reminders for the Philippines as it strives to remain focused on delivering on a 6.5 to 7.5 percent growth target for the whole year, even as the IMF raised its gross domestic product (GDP) growth prognosis for the country to 6.7 percent from 6.5 percent.
Flexibility and quick response to any of the unsettling risks outlined by both the IMF and World Bank should underpin the government’s plans in spite of our economic fundamentals continuing to be on relatively solid footing.
Russia, for example, already issued new calls for gas delivery curtailments to Germany. Responding less than 24 hours later, 26 of the 27 members of the European Union announced they would reduce their natural gas consumption starting next week to punish Russia for its invasion of Ukraine.
Such politically motivated declarations are prone to retaliations that could aggravate fuel pricing, which at the moment is a major reason for our elevated June inflation assessment. High energy costs remain a huge risk for the Philippine economy, being totally dependent on imported fuels.
The Philippines also faces some stress from high food prices, especially because of imported inputs like fertilizers for agricultural products or feed corn for livestock and poultry that have become more costly in recent months. Russia and Ukraine, two countries currently at war, are major global suppliers of fertilizer components and feed grains.
Continuously refining our energy and food security programs and remaining focused on carrying it through the next years is a given, but more short term responses to augment emergency policies adopted by the previous administration are needed.
The government is seeing its ability to respond to crises increasingly reduced after exploiting a variety of measures, first to mitigate the job losses in 2020 during the first months of lockdowns, and in the early part of 2021 when the disruptions in global supply chains became apparent as the world economy restarted.
Then early this year, Russia invaded Ukraine, further aggravating energy pricing and food supply shortages. China’s lockdowns also contributed a fair share of discomfort to the global economy. Lately, talks about the US heading for a recession have gained increased ground.
Clearly, too many risks still abound that can jolt us to a rude awakening. The Philippines, after all, is tightly enmeshed in the goings on of the global economy, and sneezing by developed economies can have dire consequences on us.
End of low inflation era
In a special report included in the World Bank’s latest “Global Economic Prospects,” the threat of stagflation – which happened in the 1970s as a result of the Middle East oil price hikes – is extensively discussed. While there are debates whether another stagflation could possibly occur, what particularly caught my attention was the part dealing with disinflation.
The World Bank research teams note that the structural forces that have kept inflation low over the past three decades may be receding, and as a result, lead to more persistent higher inflation levels with less effective measures to anchor long-term inflation expectations.
The participation of China and Eastern Europe into the global trading system during the last 30 years has led to many manufactured goods produced at lower cost. The maturing of global value chains, however, in recent years have caused a slowing down in trade growth, such that new tariff and import restrictions, rising protectionism, and geopolitical risks may reverse the pace of globalization and its disinflationary impact.
It is also possible, according to the World Bank special report, that the gains that could be derived from automation in the manufacture of consumer goods have now been exhausted, and thus, will no longer contribute the same impact it did when such technical advances first appeared.
Shifts of resources from agriculture to higher productivity manufacturing in EMDEs during the last decades also contributed to disinflationary effects. This too is now seen as a process that is losing its ability to keep inflation at low levels.
Definitely, we are in the midst of global changes that challenge the normal pace of life we had been accustomed for some time now.
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