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What Will Break First As The Fed Continues To Tighten: Financial Giants Duke It Out

What Will Break First As The Fed Continues To Tighten: Financial Giants Duke It Out

One week ago, in its latest and quite apocalyptic note…



What Will Break First As The Fed Continues To Tighten: Financial Giants Duke It Out

One week ago, in its latest and quite apocalyptic note which was a must-read for every finance professional (and is still available to pro subs), Elliott Management not only previewed the dire endgame of this monetary experiment, and for those who missed it here it is again...

... the Fed has never raised rates into a struggling economy, as it is now doing. What level of rates will occasion a crash? Or will it be some combination of a melee factor and rates? We can’t know. A crash would certainly put a strong damper on consumer and producer prices. Will they just keep raising rates until the economy does crash? Central bankers actually say that they are aiming for a soft landing. But they are not puppeteers. They do not have the control that they profess to have. Whether there is a soft landing or a “hard” landing (crash) is completely unknown at present.

As one final example, policymakers state their determination to tame inflation, but QE has not truly reversed. Mortgages on central-bank balance sheets are not being sold. They are raising interest rates like crazy, and the natural way for inflation to go from 10% to 2% is through a serious recession. There is still $30 trillion on central banks’ balance sheets. So what happens when the recession is in full force? Do the central bank balance sheets go to $50 trillion?

The world is on the path to hyperinflation, which is the direct route to global societal collapse and civil or international strife. It is not baked, but that is the path that we are treading. Uplifting, right

...  the hedge fund with nearly 50 years of capital markets experience also laid out a list of triggers that could "break" the market and lead to the next crash, including:

  • Banks and other lenders are starting to be forced to recognize large losses on bridge financings and loans;
  • Leveraged holders of mortgage-backed securities, and structured-debt products and CLOs, may be facing substantial markdowns;
  • Liquidity in rates and credit markets has been dramatically reduced;
  • Leveraged private equity will be under severe stress in the event of a meaningful recession; and
  • Housing unaffordability has taken the largest and quickest jump in history (the combination of the 45% rise in home prices from 2019 through 2022 and the extraordinary and rapid rise in interest rates).

A "market break" is, of course, a topic that has been near and dear to our heart ever since we first predicted in January that the Fed's rate hikes will inevitably lead to something snapping.

And while last week's near-record market meltup on hopes that the CPI miss means the Fed will slowdown and/or pivot, we still have a lot of rate hikes and tightening pain to go, meaning that the odds of something big "breaking" remain dangerously high. So high in fact that Goldman's research team, after coming out with a laughable (in retrospect) S&P500 target of 5,100 exactly one year ago, has become outright apocalyptic on stocks (if there was one reason to turn bullish on stocks, that's it), and in its most read report last week, asks "What Could Break?" as a result of central bank tightening.

While Goldman does cover a lot of potential trigger point in the full report (which we recommend all pro subs read), we focus on the summary from Goldman editor Allison Nathan who partitions the findings into several core sections as follows:

Although the market apparently took comfort from October’s better-than-expected US CPI print, with inflation still far above target, it’s clear that the major central banks’ inflation fight is far from over. The aggressive policy tightening so far—and still in the pipe—has raised concerns about what could break in a global financial system that has grown accustomed to low rates. Which financial stability risks are worth watching, whether policymakers have the tools to effectively manage those risks, and if they could prompt central banks to slow or even pause the pace of tightening, is Top of Mind.

We first speak with Jeremy Stein, Professor at Harvard University, who was a vocal advocate of the view that monetary policy should be implemented with financial stability in mind during his tenure on the Fed’s Board of Governors in the aftermath of the Global Financial Crisis (GFC). Despite this long-held view, he argues that the still-acute inflation problem the US faces today means that “the Fed’s only option is to continue to make inflation its number one policy priority for now.” That said, he warns that financial instability risks should not be discounted, and that the Fed’s ability to address those risks is probably more limited than the market expects and than in past episodes of stress. That’s not only because actions to quell stability risks—the so-called “Fed put”—would almost certainly run counter to the prevailing monetary policy goal of slaying inflation, but also because we can’t assume that the tools that addressed past crises—such as the emergency credit facilities implemented at the beginning of the pandemic—could be employed today.

Vítor Constâncio, former Vice President of the ECB, has historically taken the opposite view of Stein—arguing that monetary policy should not respond to financial stability concerns—a view he stands by today even as the ECB now formally includes financial stability considerations in its policy decisions. But given that both the Fed and the ECB are already approaching the expected peak in policy rates, he expects the current hiking cycle to end before significant financial stability concerns arise that could force a recalibration of monetary policy. However, he worries about the potential effects of quantitative tightening (QT), especially in the Euro area, where incentives for banks to repay their TLTRO loans early will likely lead to an already sizable reduction in the ECB’s balance sheet even before the ECB embarks on formal QT. That said, he believes Euro area policymakers have all the tools they need nowadays to avoid a repeat of the 2010 sovereign bond crisis.

But GS European rates strategists George Cole and Simon Freycenet are less sure that financial stability risks won’t affect monetary policy in Europe. In their view, concerns about rate-sensitive debt in both the Euro area and the UK constrain the ECB and BoE compared to the Fed in their inflation fight, likely leading to a more cautious approach from both.   These risks, they say, may force an implicitly higher tolerance for inflation in Europe, although Stein and Constâncio believe that the US could potentially be headed in a similar direction as well.

* * *

So which risks—outside of a monetary policy mistake in itself—are worth watching? On both Stein and Constâncio’s lists is illiquidity in the US Treasury and other sovereign bond markets. Praveen Korapaty, GS Chief Interest Rates Strategist, explains why cracks in the plumbing of the market’s microstructure have appeared: a surge in outstanding sovereign debt that has far outpaced intermediation capacity mainly owing to post-GFC regulations that discourage market-making in these securities. Although Stein says that these issues are easily fixable, unless and until they are, Korapaty argues that the Fed and other major central banks may be increasingly forced to use their balance sheets to maintain orderly market functioning rather than to conduct monetary policy.

Constâncio and Stein are also concerned about the asset-liability mismatches of mutual funds, and especially of open-end bond funds, that have the potential to trigger asset fire sales in times of stress. This structural fragility was on full display in the US in early 2020 and never went away, Stein says, because the Fed bailed out these funds, but may not be able to do so the next time around. They are also worried about mounting pressure on sovereign and corporate borrowers in Emerging Market (EM) economies and beyond, especially, as Stein notes, given the sharp appreciation of the Dollar—a vulnerability that will likely persist according to GS FX strategists Kamakshya Trivedi and Sid Bhushan, who make the case that Dollar appreciation has further room to run.

Indeed, although GS FX strategist Karen Reichgott Fishman finds that FX intervention by many EM central banks (and the BoJ) has slowed the pace of domestic currency depreciation against the Dollar—if not prevented it—GS FX and EM strategists Ian Tomb and Teresa Alves point out that several Frontier economies are already in the midst of classic EM crises precipitated by a Dollar funding squeeze. That said, most major EMs have proven relatively resilient to these stresses, and globally-systemic EM risks appear low, in their view.

Even beyond EM, corporate borrowers are worth keeping an eye on, according to GS credit strategists Lotfi Karoui and Vinay Viswanathan. They argue that while fundamentals are still healthy for these borrowers, companies that have issued floating-rate leveraged loans, as well as commercial real estate (CRE) borrowers, are vulnerable to a higher-for-longer cost of funding shock. But they believe the risk of this shock threatening financial stability is lower than in past cycles.

And what about perhaps the most obvious place to look— pension funds—given that they were at the epicenter of the
most recent stress episode
that arguably increased market focus on financial breakages in the first place? GSAM strategists Ed Francis, Matthew Maciaszek, and Michael Moran explain the recent pressure in the UK pension fund industry and why a similar crisis is less likely to repeat elsewhere, which Freycenet generally agrees with.

Finally, GS global economists Daan Struyven and Devesh Kodnani take a survey approach to assess the above—and other—financial stability risks that GS research analysts are watching. But, after all this discussion and monitoring of known risks, perhaps the biggest risks of all remain the “unknown unknowns” that we aren’t watching at all.

To summarize, the most likely market "fracture points" according to Goldman are, or should be familiar to regular ZH readers as we have discussed many if not all of these repeatedly in recent months, and include:

  • Treasury (il)liquidity
  • Asset-liability mismatches of open-end mutual bond funds
  • EM and Frontier economy crises spiraling out of control as a result of the record dollar short squeeze
  • Corporate borrower weakness, especially among those who have exposure to floating rates
  • Pension funds

Below we excerpt some more from the Goldman report, and specifically the interview with former Fed governor Jeremy Stein:

Allison Nathan: One area of concern seems to be Treasury market liquidity. Is that concern warranted?

Jeremy Stein: Yes; the spike in Treasury market volatility in March 2020 proved that concerns over market liquidity are warranted. But the Fed could at least partially address this vulnerability with some relatively simple fixes. For example, the supplementary leverage ratio, which is a risk-insensitive capital requirement imposed on systemically important banks in the wake of the Global Financial Crisis (GFC), was unhelpful in the March 2020 episode, because it discourages banks from making markets in Treasury securities. The Fed could easily adjust this requirement so that it serves its intended purpose of acting as a backstop rather than as a primary binding constraint on market-making, and do so without weakening overall capital in the banking system by making a compensating adjustment in the risk-based requirements so that capital in the system remains the same.

The Fed could also make its standing repo facility—which lends against Treasury securities as collateral—accessible to a larger set of financial market participants beyond banks and primary dealers. If access to the facility was expanded to allow any hedge fund, mutual fund, etc. to bring Treasuries to the Fed and get cash at a moment’s notice, the asset fire sales that characterized the March 2020 stress episode may not have occurred to the same extent. I have heard some express the view that such broader access could create a moral hazard problem, but what is the bigger problem—lending against Treasury collateral, or, as recently occurred in the UK, getting cornered into buying a lot of Treasuries at a time when you're supposed to be tightening monetary policy?

* * *

Allison Nathan: What other financial stability risks are worth watching?

Jeremy Stein: I continue to worry about the open-end bond fund complex, which the Fed basically bailed out in March 2020 by creating credit facilities that had a very powerful effect in stemming the large outflows and liquidations of assets from these funds at the time. While that was absolutely the right thing to do, it prevented us from learning more about the real fragility of some of these funds and created a moral hazard problem—credit spreads tightened, and business went on as usual with very little—if any—change in the underlying structure of these funds.

I also worry that the sharp appreciation of the Dollar resulting from the Fed’s aggressive rate hikes is putting stress on pockets of the financial system. Corporates in many Emerging Markets borrow in dollars, which can be an inexpensive source of funding but puts substantial pressure on these economies when the Dollar strengthens. Many of these countries are relatively small, so the trade spillovers may turn out to be limited, but the bigger risk is that cracks in the financial system could emerge—when loans go bad, what banks are overexposed to these borrowers? Japan is also a potential source of concern in this context. Its debt-to-GDP is running at more than 200%, with much of that debt effectively rolling on an overnight basis given the effect of their massive QE on consolidated debt maturity. That’s not a problem when interest rates are at zero, but if Japan begins to import inflation given global inflation trends and the strength of the Dollar, and the BoJ must start fighting inflation, this could become quite problematic. Many countries are facing the same issue, but Japan is an extreme case that bears watching.

Next, for the visual learners, a primer on US financial instability...

... and also Euro area.

There is much more in the full note, including Goldman's take on FX interventions (they buy time, and "central banks will likely continue to conduct FX interventions over the near term as the Dollar continues to strengthen"), on when the US Dollar will peak, an assessment of the risk of a funding shock, can the UK pension fund crisis repeat and where, how long can the ECB and BOE keep fighting inflation with both economies now in recession, what the risk is in "risk free" rates, and more.

As noted above, all professional subscribers are encouraged to read the full note available in the usual place.

Tyler Durden Sun, 11/13/2022 - 21:44

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Your Lululemon Faves May Not be Around for Long

A sportswear giant is accusing lululemon of patent infringement.



A sportswear giant is accusing lululemon of patent infringement.

The Gucci loafers. The Burberry  (BBRYF) trench coat. When it comes to fashion, having a unique design is everything. This is why brands spend millions both creating and protecting their signature looks and the reason, as in the case of Adidas  (ADDDF) , extricating a brand's design from creators who behave badly is a costly and difficult process.

There is also the constant effort to release new styles without infringing on another group's style. This week, sportswear giant Nike  (NKE) - Get Free Report filed a lawsuit accusing lululemon  (LULU) - Get Free Report of infringing on its patents in the shoe line that the Vancouver-based activewear company launched last spring.

After years of selling exclusively clothing, accessories and the odd yoga mat, lululemon expanded into the world of footwear with a running shoe it dubbed Blissfeel last March. These were soon followed by training shoe and pool slide styles known as Chargefeel, Strongfeel -- all three of the designs (including a Chargefeel Low and a Chargefeel Mid design) have been mentioned in the lawsuit as causing "economic harm and irreparable injury" to Nike.

Nike's History Of Suing Lululemon Over Design

The specific issue lies in the technology used to build the shoes. According to the lawsuit filed in Manhattan federal court, certain knitted elements, webbing and tubular structures are too similar to ones that had been used by Nike earlier.

Nike is keeping the amount it hopes to receive from lululemon under wraps but is insisting the company infringed on its patent when releasing a shoe line too similar to its own. Lululemon had previously talked about how its shoe line "far exceeded" its leaders' expectations both in terms of sales and ability to expand.

In a Q1 earnings call, chief executive Calvin McDonald said that the line "definitely had a lot more demand than we anticipated."

Nike has already tried to go after lululemon through the courts once before. In January 2022, it accused the company of infringing on six patents over its at-home Mirror Home Gym. As the world emerged out of the pandemic, lululemon has been billing it as a hybrid model between at-home and in-person classes. 

The lawsuit was also filed in the U.S. District Court in Manhattan but ultimately fizzled out.

When it comes to the shoe line lawsuit, Lululemon has been telling media outlets that "Nike's claims are unjustified" and the company "look[s] forward to proving [their] case in court."


Some More Examples Of Prominent Design Battles

In the fashion industry, design infringement accusations are common and rarely lead to high-profile rulings. While Nike has gone after the technology itself in both cases, lawsuits more often focus on the style or pattern on a given piece.

Shein, a China-based fast-fashion company that took on longtime leaders like H&M  (HNNMY)  and Fast Retailing  (FRCOF) 's Uniqlo with its bottom-of-the-barrel pricing, has faced numerous allegations from smaller and independent designers over the copying of designs -- in some cases not even from fashion designers but artists painting in local communities.

"They didn't remotely bother trying to change anything," U.K.-based artist Vanessa Bowman told the Guardian after seeing her painting of a local church appear on a sweater on Shein's website. "The things I paint are my garden and my little village: it’s my life. And they’ve just taken my world to China and whacked it on an acrylic jumper."

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EY Eyes Comeback for Biopharma M&A

EY noted that the total value of biopharma M&A in 2022 was $88 billion, down 15% from $104 billion in 2021. The $88 billion accounted for most of the…



A recent trickle of mergers and acquisitions (M&A) announcements in the billion-dollar-and-up range suggests that biopharma may be ready to resume dealmaking this year—although the value and number of deals isn’t expected to return to the highs seen just before the pandemic.

2022 ended with a handful of 10- and 11-figure M&A deals, led by Amgen’s $27.8 billion buyout of Horizon Therapeutics, announced December 13. The dealmaking continued into January with three buyouts announced on the first day of the recent J.P. Morgan Healthcare Conference: AstraZeneca agreed to acquire CinCor Pharma for up to $1.8 billion, while Chiesi Farmaceutici agreed to shell out up to $1.48 billion cash for Amryt, and Ipsen Group said it will purchase Albireo Pharma for $952 million-plus.

Biopharmas generated about $88 billion in M&A deals in 2022, down 15% from $104 billion in 2021. The $88 billion accounted for most of the $135 billion in 124 deals in the life sciences. The number of biopharma deals fell 17%, to 75 deals from 90. The other 49 deals totaling $47 million consisted of transactions in “medtech,” which includes diagnostics developers and companies specializing in “virtual health” such as telemedicine. [EY]
EY—the professional services firm originally known as Ernst & Young—recently noted that the total value of biopharma M&A in 2022 was $88 billion, down 15% from $104 billion in 2021 [See Chart]. The $88 billion accounted for most of the $135 billion in 124 deals in the life sciences. That $135 billion figure is less than half the record-high $313 billion recorded in 2019, including $261 billion in 70 biopharma deals.

The number of biopharma deals fell 17% to 75 deals from 90. EY’s numbers include only deals greater than $100 million. The other 49 deals totaling $47 million consisted of transactions in “medtech,” which includes diagnostics developers and companies specializing in “virtual health” such as telemedicine.

We expect this to be a more active year as the sentiment starts to normalize a little bit,” Subin Baral, EY Global Life Sciences Deals Leader, told GEN Edge.

Baral is not alone in foreseeing a comeback for biopharma M&A.

John Newman, PhD, an analyst with Canaccord Genuity, predicted last week in a research note that biopharma companies will pursue a growing number of smaller cash deals in the range of $1 billion to $10 billion this year. He said rising interest rates are discouraging companies from taking on larger blockbuster deals that require buyers to take on larger sums of debt.

“We look for narrowing credit spreads and lower interest rates to encourage larger M&A ($50 billion and more) deals. We do not anticipate many $50B+ deals that could move the XBI +5%,” Newman said. (XBI is the SPDR S&P Biotech Electronic Transfer Fund, one of several large ETFs whose fluctuations reflect investor enthusiasm for biopharma stock.)

Newman added: “We continue to expect a biotech swell in 2023 that may become an M&A wave if credit conditions improve.”

Foreseeing larger deals than Newman and Canaccord Genuity is PwC, which in a commentary this month predicted: “Biotech deals in the $5–15 billion range will be prevalent and will require a different set of strategies and market-leading capabilities across the M&A cycle.”

Those capabilities include leadership within a specific therapeutic category, for which companies will have to buy and sell assets: “Prepared management teams that divest businesses that are subscale while doubling down on areas where leadership position and the right to win is tangible, may be positioned to deliver superior returns,” Glenn Hunzinger, PwC’s U.S. Pharma & Life Science Leader, and colleagues asserted.

The Right deals

Rising interest and narrowing credit partially explain the drop-off in deals during 2022, EY’s Baral said. Another reason was sellers adjusting to the drop in deal valuations that resulted from the decline of the markets which started late in 2021.

Subin Baral, EY Global Life Sciences Deals Leader

“It took a little bit longer to realize the reality of the market conditions on the seller side. But on the buyer side, the deals that they were looking at were not just simply a valuation issue. They were looking at the quality of the assets. And you can see that the quality deals—the right deals, as we call them—are still getting done,” Baral said.

The right deals, according to Baral, are those in which buyers have found takeover targets with a strong, credible management team, solid clinical data, and a clear therapeutic focus.

“Rare disease and oncology assets are still dominating the deal making, particularly oncology because your addressable market continues to grow,” Baral said. “Unfortunately, what that means is the patient population is growing too, so there’s this increased unmet need for that portfolio of assets.”

Several of 2022’s largest M&A deals fit into that “right” category, Baral said—including Amgen-Horizon, Pfizer’s $11.6-billion purchase of Biohaven Pharmaceuticals and the $6.7-billion purchase of Arena Pharmaceuticals (completed in March 2022); and Bristol-Myers Squibb’s $4.1-billion buyout of Turning Point Therapeutics.

“Quality companies are still getting funded one way or the other. So, while the valuation dropped, people were all expecting a flurry of deals because they are still companies with a shorter runway of cash that will be running to do deals. But that really didn’t happen from a buyer perspective,” Baral said. “The market moved a little bit from what was a seller’s market for a long time, to what we would like to think of as the pendulum swinging towards a buyers’ market.”

Most biopharma M&A deals, he said, will be “bolt-on” acquisitions in which a buyer aims to fill a gap in its clinical pipeline or portfolio of marketed drugs through purchases that account for less than 25% of a buyer’s market capitalization.

Baral noted that a growing number of biopharma buyers are acquiring companies with which they have partnered for several years on drug discovery and/or development collaborations. Pfizer acquired BioHaven six months after agreeing to pay the company up to $1.24 billion to commercialize rimegepant outside the U.S., where the migraine drug is marketed as Nurtec® ODT.

“There were already some kind of relationships there before these deals actually happened. But that also gives an indication that there are some insights to these targets ahead of time for these companies to feel increasingly comfortable, and pay the valuation that they’re paying for them,” Baral said.

$1.4 Trillion available

Baral sees several reasons for increased M&A activity in 2023. First, the 25 biopharma giants analyzed by EY had $1.427 trillion available as of November 30, 2022, for M&A in “firepower”—which EY defines as a company’s capacity to carry out M&A deals based on the strength of its balance sheet, specifically the amount of capital available for M&A deals from sources that include cash and equivalents, existing debt, and market cap.

That firepower is up 11% from 2021, and surpasses the previous record of $1.22 trillion in 2014, the first year that EY measured the available M&A capital of large biopharmas.

Unlike recent years, Baral said, biopharma giants are more likely to deploy that capital on M&A this year to close the “growth gap” expected to occur over the next five years as numerous blockbuster drugs lose patent exclusivity and face new competition from lower-cost generic drugs and biosimilars.

“There is not enough R&D in their pipeline to replenish a lot of their revenue. And this growth gap is coming between 2024 and 2026. So, they don’t have a long runway to watch and stay on the sidelines,” Baral said.

This explains buyers’ interest in replenishing pipelines with new and innovative treatments from smaller biopharmas, he continued. Many smaller biopharmas are open to being acquired because declining valuations and limited cash runways have increased investor pressure on them to exit via M&A. The decline of the capital markets has touched off dramatic slowdowns in two avenues through which biopharmas have gone public in recent years—initial public offerings (IPOs) and special purpose acquisition companies (SPACs).

EY recorded just 17 IPOs being priced in the U.S. and Europe, down 89% from 158 a year earlier. The largest IPO of 2022 was Prime Medicine’s initial offering, which raised $180.3 million in net proceeds for the developer of a “search and replace” gene editing platform.

Another 12 biopharmas agreed to SPAC mergers with blank-check companies, according to EY, with the largest announced transaction (yet to close at deadline) being the planned $899 million merger of cancer drug developer Apollomics with Maxpro Capital Acquisition.

“For the smaller players, the target biotech companies, their alternate source of access to capital pathways such as IPOs and SPACs is shutting down on them. So how would the biotech companies continue to fund themselves? Those with quality assets are still getting funded through venture capital or other forms of capital,” Baral said. “But in general, there is not a lot of appetite for the biotech that is taking that risk.

Figures from EY show a 37% year-to-year decline in the total value of U.S. and European VC deals, to $16.88 billion in 2022 from $26.62 billion in 2021. Late-stage financing rounds accounted for just 31% of last year’s VC deals, down from 34% in 2021 and 58% in 2012. The number of VC deals in the U.S. and Europe fell 18%, to 761 last year from 930 in 2021.

The decline in VC financing helps explain why many smaller biopharmas are operating with cash “runways” of less than 12 months. “Depending on the robustness of their data, their therapeutic area, and their management, there will be a natural attrition. Some of these companies will just have to wind down,” Baral added.

M&A headwinds

Baral also acknowledged some headwinds that are likely to dampen the pace of M&A activity. In addition to rising interest rates and inflation increasing the cost of capital, valuations remain high for the most sought-after drugs, platforms, and other assets—a result of growing and continuing innovation.

Another headwind is growing regulatory scrutiny of the largest deals. Illumina’s $8 billion purchase of cancer blood test developer Grail has faced more than two years of challenges from the U.S. Federal Trade Commission and especially the European Commission—while Congress acted last year to begin curbing the price of prescription drugs and insulin through the “Inflation Reduction Act.”

Those headwinds may prompt many companies to place greater strategic priority on collaborations and partnerships instead of M&A, Baral predicted, since they offer buyers early access to newer technologies before deciding whether to invest more capital through a merger or acquisition.

“Early-stage collaboration, early minority-stake investment becomes increasingly important, and it has been a cornerstone for early access to these technologies for the industry for a long, long time, and that is not changing any time soon,” Baral said. “On the other hand, even on the therapeutic area side, early-stage development is still expensive to do in-house for the large biopharma companies because of their cost structure.

“So, it is efficient cost-wise and speed-wise to buy these assets when they reach a certain point, which is probably at Phase II onward, and then you can pull the trigger on acquisitions if needed,” he added.

The post EY Eyes Comeback for Biopharma M&A appeared first on GEN - Genetic Engineering and Biotechnology News.

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IMF Upgrades Global Growth Forecast As Inflation Cools

IMF Upgrades Global Growth Forecast As Inflation Cools

The International Monetary Fund published its latest World Economic Outlook on Monday,…



IMF Upgrades Global Growth Forecast As Inflation Cools

The International Monetary Fund published its latest World Economic Outlook on Monday, painting a slightly less gloomy picture than three and a half months ago, as inflation appears to have peaked in 2022, consumer spending remains robust and the energy crisis following Russia’s invasion of Ukraine has been less severe than initially feared.

But, as Statista's Felix Richter notes, that’s not to say the outlook is rosy, as the global economy still faces major headwinds.

However, the IMF predicts the slowdown to be less pronounced than previously anticipated.

Global growth is now expected to fall from 3.4 percent in 2022 to 2.9 percent this year, before rebounding to 3.1 percent in 2024.

The 2023 growth projection is up from an October estimate of 2.7 percent, as the IMF sees far fewer countries facing recession this year and does no longer anticipates a global downturn.

Infographic: IMF Upgrades Global Growth Forecast as Inflation Cools | Statista

You will find more infographics at Statista

One of the reasons behind the cautiously optimistic outlook is the latest downward trend in inflation, which suggests that inflation may have peaked in 2022.

The IMF predicts global inflation to cool to 6.6 percent in 2023 and 4.3 percent in 2024, which is still above pre-pandemic levels of about 3.5 percent, but significantly lower than the 8.8 percent observed in 2022.

“Economic growth proved surprisingly resilient in the third quarter of last year, with strong labor markets, robust household consumption and business investment, and better-than-expected adaptation to the energy crisis in Europe,” Pierre-Olivier Gourinchas, the IMF’s chief economist, wrote in a blog post released along with the report.

“Inflation, too, showed improvement, with overall measures now decreasing in most countries—even if core inflation, which excludes more volatile energy and food prices, has yet to peak in many countries.”

The risks to the latest outlook remain tilted to the downside, the IMF notes, as the war in Ukraine could further escalate, inflation continues to require tight monetary policies and China’s recovery from Covid-19 disruptions remains fragile. On the plus side, strong labor markets and solid wage growth could bolster consumer demand, while easing supply chain disruptions could help cool inflation and limit the need for more monetary tightening.

In conclusion, Gourinchas calls for multilateral cooperation to counter “the forces of geoeconomic fragmentation”.

“This time around, the global economic outlook hasn’t worsened,” he writes. “That’s good news, but not enough. The road back to a full recovery, with sustainable growth, stable prices, and progress for all, is only starting.”

However, just because the 'trend' has shifted doesn't mean it's mission accomplished...

That looks an awful lot like Central Bankers' nemesis remains - global stagflation curb stomps the dovish hopes.

Tyler Durden Tue, 01/31/2023 - 14:45

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