In 2023, both the demand and supply sides point to upward pressure across much of commodity prices. Not all commodity prices will necessarily move up. As far as energy, metals and minerals are concerned, the parrot is likely looking up at this point; definitely in this case the best thing to do is to mimic the parrot.
Three significant changes to the macroeconomic policy regime in advanced economies, compared to the post-global financial crisis period, have unfolded in the last two years. First, fears of a chronic insufficiency of aggregate demand as a growth deterrent prevailing after the 2008 global financial crisis, have been superseded by supply-side shocks and inflation. Second, as a result of the first change, the era of abundant and cheap liquidity provided by central banks has given way to higher interest rates and liquidity squeezes. Finally, because of the previous changes, there was a strong devaluation of financial assets in 2022. There are now fears about multiple possibilities of financial shocks ahead.
Interview with Otaviano Canuto, Senior Fellow at the Policy Center for the New South December 14, 2022
The US dollar has risen dramatically in value against other currencies in the recent past. Three different channels through which factors affecting bilateral exchange rates operate have been pulling up the U.S. dollar: yield differentials, liquidity differentials, and growth differentials. The strong appreciation of the US dollar against other currencies in the recent past reinforced the contractionary pressures present in the global economy. Ultimately, the “turn” or “pivot” of the dollar will most likely occur when a “turn” or “pivot” occurs in US monetary policy, given the latter’s key weight on the determination of growth and yield differentials.
There is an international movement to tighten monetary and fiscal policies as a response to the global inflation phenomenon. Accordingly, global economic growth projections for 2022 and 2023 have been revised downward. As inflation will decline only gradually, given the price stickiness of its core components, there is likely to be momentarily a situation of stagflation, i.e. a combination of significant inflation and low or negative GDP growth. We discuss how the current global stagflation experience might develop into one of a soft landing, a sharp downturn, or a deep recession. The evolution will depend on how fast inflation responds downward to economic deceleration. We therefore suggest framing the response in terms of assessing to where major economies’ Phillips curves have shifted. Phillips-curve shifts will also reflect cross-border repercussions of country-specific policy choices. Furthermore, sudden abrupt deteriorations of financial conditions may cause additional moves in Phillips curves.
CGTN's Phillip Yin talks to Otaviano Canuto, Senior Fellow, Policy Center for the New South about IMF's global economic outlook.
Even knowing that there is a time lag between interest rate decisions and their effects, the Fed will not be able to ignore what happens to monthly inflation rates during the crossing until next year. Even if that poses a risk to a soft landing of the economy. What seems more likely, however, appears to be the combination of a global economic slowdown and continued tightening of global financial conditions. With equity markets in advanced economies still exhibiting downward slides until the monetary-financial grip stops.
In addition to hikes in basic interest rates, liquidity conditions in the US economy will also be affected by the shrinking of the Fed's balance sheet starting this month. The "quantitative easing" (QE) that resumed strongly in March 2020, in response to the financial shock at the beginning of the pandemic, will now give way to a "quantitative tightening". How complementary - or substitute - will be those movements in interest rates and balance sheet downsizing? What are their likely consequences on capital flows to emerging markets?
(A) OECD Economics Department Webinar: Policy Challenges for Emerging Market Economies (B) A Perfect Storm for the Global Economy? (C) Otaviano Canuto discusses the May Day marches in Latin America
One can expect slower globalization (“slowbalization”) and a greater degree of regionalization. The term “slowbalization”—slowing growth in cross-border flows—can indeed be applied to the trends for goods, capital, and people after the global financial crisis rather than deglobalization—or outright declines in cross-border flows and stocks. The increases in digital cross-border activity also strengthen the concept of "newbalization": the nature and scope of globalization is evolving in the coming years as flows may continue to slow in tangible areas, like the trade of goods, while speeding up in intangible areas, including trade in services and cross-border data flows. On the other hand, “the death of globalization was an exaggerated announcement”.
The world food price index collected for the last 60 years by the United Nations Food and Agriculture Organization (FAO) hit its highest record in March, declining gently in April. Pandemic, war and death in Ukraine, and droughts in the last 2 years… Such a combination looks apocalyptical. Now it is adding global hunger risks, because of the food price crisis. The fiscal fragility inherited from the pandemic limits public programs to deal with issues in many developing countries.
Commodity prices stabilized in April. However, the previous commodity price shock, intensifying trends that have been present since mid-2020, have already led to significantly higher price levels in 2022. The new jumps made the increase in energy prices in the last two years the biggest in the last fifty years, since the oil shock in 1973. The war in Ukraine and the shock of energy commodity prices have not been favorable to the energy transition, as seen in the race for coal.
The "World Economic Outlook" report released by the International Monetary Fund (IMF) on April 19 depicted a worsening in the global economic scenario for 2022: lower economic growth and higher inflation than the January projections. As the Director-General Kristalina Georgieva said in the previous week, the war in Ukraine represented a "substantial setback" for the global economic recovery. Emerging market and developing economies (EMDE) face a common set of external shocks: rising energy and food prices; tightening in global financial conditions caused by the prospect of sharper interest rate hikes and anticipation of "quantitative tightening"; and return of restrictions on mobility in China, on account of the Covid zero policy, leading to slumping in growth and weakening one of the primary growth drivers for the other EMDE. However, the impacts of those common shocks on EMDE have been heterogeneous.
The heavy financial sanctions on Russia after the invasion of Ukraine sparked speculations that the weaponization of access to reserves in dollars, euros, pounds, and yen would spark a division in the international monetary order. There has been a reduction in the degree of "dollar dominance” with the dollar's share of central bank reserves falling since the beginning of the century. The relative dominance of the dollar appears to be declining but at a very gradual pace.
1. OTAVIANO CANUTO Global Impacts of War in Ukraine - a 3-min video summarizes the short-term impacts of Russia's invasion of Ukraine on the global economy 2. Podcast - War in Ukraine and Sanctions against Russia : an endless boxing match? 3. Commodity Markets Outlook, Urbanization & Commodity Demand In partnership with the World Bank