Economic Outlook Q4: Heading Into Another Global Slowdown As Inflation Remains High

MIDF Investment expects the global growth to moderate to 3% this year, as the low base effect wanes, the pace of growth this year will be back to more normalized levels after the robust +6.1% rebound last year.

After two years of battling the Covid-19 pandemic, improved public health and increased vaccination rate allowed countries to ease Covid-19 restrictions. The post-pandemic economic reopening, therefore, will result in increased consumer spending and business activities. Businesses will increase hiring and production to cope with the growing demand. Nevertheless, producers continued to indicate experiencing post-pandemic challenges such as rising prices and costs, shortage of raw materials and labour, and other supply constraints. Although the ongoing war in Ukraine remains one of the uncertainties affecting the global growth outlook, the recent correction in the global commodity prices at least signal stabilisation in global supply chain condition.

Several factors that emerged led to a downgrading of the global growth outlook for this year. While the war in Ukraine and the reintroduction of Covid-19 lockdown in China had led to a downward revision to the global growth outlook, the continued tightening of monetary policy by central banks in many countries (including major economies like the US, euro area, and UK) has caused a shift in the narrative that the global economy may be experiencing slowing growth momentum heading into 2023.

For many countries, inflation has been trending upward due to the rise in commodity prices, affecting global prices of food and energy. Although the concerns to a certain extent eased due to the recent correction in commodity prices, the level of commodity prices remained elevated compared to previous years. This will still result in higher inflation this year, which can be explained by the recovery in demand after post-pandemic economic reopening and the supply constraints faced by producers to cope with robust demand.

MIDF projects crude palm oil price to average higher this year at RM5,000 per tonne (2021: RM4,437/tonne) and Brent crude oil to be around USD105pb (2021: USD70.90pb) this year. While inflation remains the major focus affecting consumer and business sentiment globally, the global slowdown fear at least helped to ease upward price pressures. The concerns over a weaker demand outlook have helped to bring down commodity prices from the recent highs.

Central banks have started to raise interest rates to contain inflationary pressures through slowing demand. MIDF foresees central bank will remain hawkish throughout this year as inflation remained at high levels, with more rate hikes to be considered until there is a considerable decline in inflation as well as reduced pressures from strong demand.

Although inflation remains the major focus among policymakers, the rapid rise in borrowing costs will pose near-term pains that will cause consumers and businesses to slow down spending and eventually contribute to slower inflationary pressures.

The balance of risks to the global growth outlook remains on the downside. Several risks that could affect the stability of global growth are the continued rise in global inflation, the slow growth in China, renewed disruption to global supply, and escalation of geopolitical tensions (including the ongoing Russia-Ukraine war and recent ChinaTaiwan tension). The global Covid-19 pandemic has been less of a concern as countries moved to reopen their economies and international borders, but cannot rule out the possibility of reintroduction of tight containment measures should the public health condition worsens again.

Looking at recent developments, another factor that could affect global growth is the increased volatility in the financial market. The elevated inflation especially in the US has led to expectations for further aggressive policy tightening. As the recession risk has not been ruled out, slowing demand will likely hurt the global growth outlook which could begin as early as in the final quarter of 2022. Not to forget, severe and extreme weather conditions could also affect economic activities in countries affected by floods, hurricanes, wildfires and even extreme cold winter.

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