Soft landing likelihood increases, fragmentation threatens commodities: IMF

Global economic growth is forecast to slow to 3% this year and 2.9% in 2024, a 0.1 percentage point downgrade for 2024 from July projections, says the International Monetary Fund (IMF), Kallanish notes.

The likelihood of a “soft landing” has increased, in other words, the bringing down of inflation without a major downturn in activity, especially in the US.

The US surprised on the upside, with resilient consumption and investment, while euro area activity was revised downward. Many emerging market economies proved quite resilient and surprised on the upside, with the notable exception of China, facing growing headwinds from its real estate crisis and weakening confidence, the IMF says in its October World Economic Outlook.

The resolution of the US debt ceiling standoff in early June and the containment of banking sector risks in March have decreased severe downside risks. However, downside risks now stem mainly from China’s growth slowdown due to the stress in the real estate sector. “Also on the downside, commodity prices could become more volatile again amid climate and geopolitical shocks financial markets could re-price if greater inflation persists,” says IMF chief economist Pierre-Olivier Gourinchas.

The WEO report points to the need for countries to push back against divisive forces leading to geoeconomic fragmentation – or the move towards building exclusive trading blocs by putting up barriers to trade and cooperation.

Commodity markets are particularly vulnerable in the event of fragmentation, which has accelerated since Russia’s invasion of Ukraine. Commodity production is often highly concentrated because of natural endowments, and many commodities are difficult to substitute in the short term. Further fragmentation of commodity markets – which had been on the rise even before the war in Ukraine – could cause large price changes and more price volatility, the IMF observes.

“The fragmentation of mineral markets could also make the clean energy transition more costly and lead to lower-than-needed investment in renewable energy and electric vehicles,” the report states. “Taken together, the findings present yet another argument for multilateral cooperation on trade policies. At the very least, agreements on a ‘green corridor’ for critical minerals … would safeguard the global [goal] of averting climate change.”

Adam Smith Poland