Muzinich Weekly Market Comment: Tread carefully
Insight
October 28, 2024
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In our latest roundup of the key developments in financial markets and economies, we pick out the key takeaways from the latest IMF economic outlook.
With limited new economic data to guide investors, and central bankers preoccupied at the IMF/World Bank Group annual meeting last week, analysts are getting ready for a wave of Q3 earnings reports, with 42% of the S&P 500 set to announce results this week.
Meanwhile, political commentators are debating what might happen next in the escalating Israel-Iran conflict;[1] adjusting expectations in the UK for the Labour government’s first budget on October 30; and monitoring the fast-approaching US election. The outcome of the latter remains too close to call and within the margin of error in most polls; statistically, Republican nominee Donald Trump has overtaken Democrat rival Kamala Harris by the slimmest of margins – 51% versus 49.[2]
As short-term uncertainties accumulate, it is unsurprising that financial markets are trading cautiously, with implied risk premiums rising across asset classes. There is much at stake over the coming weeks, which could alter the benign global growth outlook set out by the IMF on October 22.[3]
IMF in subdued mood
In what was a downbeat update from its July outlook, the IMF left the global growth forecast for 2024 unchanged at 3.2%. However, it lowered next year’s growth projection by 0.1% (see Chart of the week).
The report highlighted the divergence in economic fortunes within developed markets that is becoming increasingly evident. Among advanced economies, the outlook for US growth was upgraded due to robust domestic consumption, with forecasts raised by 0.2% to 2.8% for this year and by 0.3% to 2.2% in 2025.
This positive adjustment was offset by a downward revision for the eurozone, with the IMF citing weak manufacturing as a major contributory factor, especially in Germany and Italy. Eurozone data released last week also pointed to continued downside risks, as the October composite purchasing managers index (PMI) remained in contraction for the second consecutive month at 49.7, while national PMI breakdowns point to widespread weakness across the monetary union.[4]
The song remains the same
Projections for emerging economies were left largely unchanged, with a slight downward revision of 0.1% to 4.2% for 2025. Disruptions to commodity production and shipping — particularly oil — alongside risks from geopolitical conflicts and extreme weather events contributed to the adjustment. However, these were offset by upgrades in regions where demand for semiconductors and electronics is surging, driven by significant investments in artificial intelligence.
In China, the IMF suggested the risk of a prolonged contraction in the property sector and financial instability remains, although it noted recent measures by the Chinese administration to boost the economy (including the property sector) were not factored into its forecast.
Last week, China implemented further monetary policy easing, with the central bank cutting the one- and five-year loan prime rates by 25 basis points, to 3.1% and 3.6%, respectively.[5]
The largest projected cut among major emerging-market economies was for Mexico, reflecting the adverse effects of restrictive monetary policy, while the biggest upward revision was for Brazil due to stronger-than-expected private consumption and investment in H1.
Debt replaces inflation as main risk
Inflation is no longer considered the primary risk to the global economy, with the IMF predicting global headline inflation will decline from an annual average of 6.7% in 2023 to 5.8% in 2024 and 4.3% in 2025. The disinflation trend is progressing broadly in line with central bank forecasts, with advanced economies expected to meet inflation targets sooner than developing economies.
Economic concerns now centre on protectionist policies that may further disrupt supply chains and on rising social tensions. As the global economy becomes more balanced, greater efforts will be needed to shift away from fiscal largesse to ensure public debt remains on a sustainable path and to rebuild fiscal buffers.
The IMF projects global public debt will reach US$100 trillion, or 93% of global GDP, by the end of this year and approach 100% by 2030. Given limited political appetite for austerity amid pressures to finance the energy transition, support aging populations and bolster security, “risks to the debt outlook are heavily tilted to the upside”.
Chart of the week: Diverging growth outlooks (per cent)
Source, International Monetary Fund, World Economic Outlook, October 22, 2024. For illustrative purposes only.
References
[1] The Guardian, ‘Strike on Iran will make world understand Israel’s might, says defence minister,’ October 23, 2024
[2] Fivethirtyeight.com, ‘Who Is Favored To Win The 2024 Presidential Election?’ October 24, 2024
[3] IMF, ‘World Economic Outlook: Policy Pivot, Rising Threats,’ October 22, 2024
[4] S&P Global, ‘HCOB Flash Eurozone PMI, October 24, 2024
[5] The People’s Bank of China, ‘Announcement on Loan Prime Rate,’ October 21, 2024
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