Market Round-Up

Economic growth in the developing world will be slower than expected over the next two years as Russia’s war in Ukraine pushes millions into extreme poverty while the World Bank warns that the risk of a debt crisis is growing ever greater. The Bank’s most recent economic outlook, published on 7th June, highlights the extent to which the repercussions from the war will exacerbate the suffering that countries have already been experiencing from more than two years of pandemic. It has suggested that approximately 75m more people will be in extreme poverty than expected in 2019 and this number may worsen if there is ineffective policy response.

With monetary policy tightening faster than expected across the globe, there is a real threat of countries being pushed into the kind of debt crisis seen in the 1980s. The conditions that the global economy is experiencing today are very similar to those of the 1970s when sharp interest rate rises were required to tame inflation, which is currently above central bank targets in almost all countries. Those rate rises led to a global recession and subsequent debt crises in a plethora of developing economies. Although commodity price increases have not hit the severity of the 70s, any further rises in the costs of goods ,along with the combination of COVID-19 outbreaks, could result in steeper interest rate rises compounding the risk of a more extensive debt crises.

Between March and May 2022, monetary authorities across the world announced more than 60 rate rises increasing borrowing costs. When interest rates were lower in 2019, capital was chasing places to invest. This has taken a turn, however, as the Bank is already seeing outflows from emerging market assets. Foreign debt in low-income countries rose by US$15.5bn to about US$166bn in 2020 while foreign debt in middle-income countries rose by US$423bn to over US$8.5tn. This leaves them worryingly exposed to steeper rate rises. World Bank data shows that growth in emerging and developing economies was 6.6% last year and in the base case scenario will fall to 3.4% this year and 4.2% next year. However, higher-than-expected rises in interest rates and energy prices along with COVID-19 could cut growth to 2.2% this year before making a partial recovery to 2.6% in 2023. The impact on emerging and developing economies will be severe with output being a third less than expected.

The Organisation for Economic Co-operation and Development (OECD) has forecast that economic growth in the UK will grind to a halt next year with only Russia performing worse among the G20 economies as it grapples with western sanctions. The main drivers of the UK’s expected weak economic activity are the combination of high inflation squeezing incomes along with a further round of tax increases.  The UK is unique in that it is wrestling several separate issues: high inflation, rising interest rates and increasing taxes. The UK’s fiscal consolidation is the highest in the G7 and Brexit continues to have some effect on economic confidence. These are difficulties Boris Johnson will need to face over the next few months to demonstrate that the government can manage the economy effectively after surviving a no-confidence vote on 6th June 2022.

Despite forecasts showing that the UK economy will record growth of 3.6% for 2022, a large proportion of this is attributable to the recovery from coronavirus at the end of last year. Growth is expected to fall to zero next year as the cost-of-living crisis worsens. The higher-than-expected goods and energy prices will not only hit developing economies, but will also reduce real incomes even further in the UK with no guarantee that the Bank of England (BoE) will be successful in returning inflation to its 2% target. The OECD expects the BoE to raise interest rates from the current 1% to 2.5% due to the significant inflationary pressure.

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