Our warnings of rising inflation and recession have finally become the consensus view. Yet many media commentators, having failed to see the problems in the first place, are now claiming they “will all be over in a few months”.
But the latest IMF forecast matches chemical industry data. It suggests that, in fact, the risks are all to the downside. As the IMF headlined last week:
“Global Economic Growth Slows Amid Gloomy and More Uncertain Outlook.
“The world’s three largest economies are stalling, with important consequences for the global outlook. Inflation is a major concern.”
The chart shows the downward spiral that has taken place since April in the Fund’s forecasts.
And the news on inflation is no better, as the second chart shows. So it seems unlikely the commentators are right to imagine central banks can quickly ‘pivot’ and cut rates to zero again.
The US Federal Reserve is hardly able to stop Russia’s Ukraine invasion. Or to suddenly reduce natural gas prices to make fertiliser and food affordable again.
Unfortunately, as the Fund admits, things are more likely to get worse, rather than better:
“The risks to the outlook are overwhelmingly tilted to the downside:
- The war in Ukraine could lead to a sudden stop of European gas flows from Russia
- Inflation could remain stubbornly high if labor markets remain overly tight or inflation expectations de-anchor, or disinflation proves more costly than expected
- Tighter global financial conditions could induce a surge in debt distress in emerging market and developing economies
- Renewed COVID-19 outbreaks and lockdowns might further suppress China’s growth
- Rising food and energy prices could cause widespread food insecurity and social unrest
- Geopolitical fragmentation might impede global trade and cooperation.
These risks seem highly likely, particularly a full shutdown of Russian gas flows to Europe. If this happens, the Fund warns:
“Inflation will rise and global growth decelerate further to about 2.6 % this year and 2% next year—a pace that growth has fallen below just five times since 1970. Under this scenario, both the United States and the euro area experience near-zero growth next year, with negative knock-on effects for the rest of the world.”
A full shutdown of Russian gas seems almost inevitable, as the German government has already warned. President Putin has already cut Nord Stream supplies to 20% of normal. He will no doubt cut them to zero once the winter starts.
- European prices are already up 9-fold from normal levels to €200/MWh
- US prices have trebled from previous levels to $9/MMBTU
As a result, European ammonia producers are having to cut back fertiliser output to conserve gas stocks. And so prices are going higher. In turn, farmers are having to cut back their plans for next season’s crops, and increase their prices for the food they produce.
Millions of people around the world are already having to cutback on buying food for their families due to today’s high prices. By wintertime, the risk is that they will have to choose between buying food or heating their homes.