WeeklyWatch – IMF warns of stunted global economic growth

4 May 2022

Stock Take

Global economic growth will face significant repercussions as the war in Ukraine and resulting humanitarian crisis continues, warns the International Monetary Fund (IMF). It’s likely that in coming months, equity markets will continue to face a tougher environment.

In its April 2022 World Economic Outlook, the IMF wrote:

“The war in Ukraine has triggered a costly humanitarian crisis that demands a peaceful resolution. At the same time, economic damage from the conflict will contribute to a significant slowdown in global growth in 2022 and add to inflation. Fuel and food prices have increased rapidly, hitting vulnerable populations in low-income countries hardest.”

Following this, it projected global growth would slow from an estimated 6.1% in 2021 to 3.6% in 2022 and 2023. This is 0.8 and 0.2 percentage points lower for 2022 and 2023, respectively, than the IMF projected in January, before the war.

Across the pond

On Thursday, data revealed that the US economy shrank by -1.4% in Q1 2022, toppling expectations of modest growth. This is largely due to falling inventory investment and an unfortunate record trade deficit.

But not everything is on the decline. For the moment, consumer spending and business investment remain steady.

Adding to the surprise first quarter economic shrinkage, mixed company results weighed on investor sentiment and weakened US equity markets. The S&P 500 declined by -3.3%, with major players Amazon and Alphabet both sharing weak earnings. Additionally, Apple – which had reported record quarterly revenues thus far – has struggled to maintain any real positive momentum due to investor concerns prompting a cautious outlook.

The US Federal Reserve’s latest monetary policy meeting will take place over the coming week, with hints towards another interest rate hike expected amid surging inflation.

On the continent

Back in the UK, the Bank of England’s Monetary Policy Committee are also meeting and, like their American counterparts, are expected to raise rates once again.

Turning to the eurozone, the region reported quarter-on-quarter Q1 GDP growth of 0.2% last week. Meanwhile, the world saw Macron win a second term as President of France, beating right-wing candidate Le Pen. However, these events weren’t enough to give everyone confidence about the region’s performance in the near future.

Franziska Palmas, Markets Economist at Capital Economics, said:

“The latest eurozone economic data reinforces our view that the region is headed for a year of stagflation; against this backdrop, we expect that eurozone assets and the euro will struggle over the remainder of this year.”

This idea was reflected in regional equity markets, as the MSCI Europe ex UK index declined by -0.8%.

Market opportunities

In China, strict lockdowns have resulted in a significant decrease in manufacturing activity. Additionally, the Shanghai SE Composite Index fell almost 1.3% last week.

However, Martin Hennecke, SJP Head of Asia Investment Advisory and Communications, said that as investors’ pessimism grows, there could actually be an opportunity there. Speaking to Bloomberg, he said:

“[China] are rolling out massive tax cuts and massive infrastructure packages, both of which are larger than what we have seen in the US recently. This coupled with very low valuations and a government focussed on stability rather than tightening and crackdowns like last year, means the opportunities are very good, so long as one holds it as part of a diversified portfolio, looks at the medium to long term and can tolerate some volatility.”

What’s more, while several economies look at the risks of a potential recession, this doesn’t necessarily mean that equity markets will fall. Adrian Frost from Artemis notes:

“The FTSE was stable through 1990 and 1991 when the UK was receding. Most would argue that the financial markets’ collapse in 2008 caused that recession – rather than the other way around. The recession in 2020 caused by Covid saw markets finish the year strongly.

“We can’t and don’t give financial advice. Yet it’s evident to us that to desert equities is to take quite a risk with (rapidly rising) inflation. Elements of that will prove transitory, but not all. Even at its current rate (6.0%), inflation will halve the value of cash in just 12 years. Yields on equities may be below inflation, but they are often better than those on bonds – and certainly better than the return on cash.”

In challenging times, speaking to a financial adviser can help with returns for investors, as together they’re able to make selective investments in companies that are well placed to perform in today’s environment.

Wealth Check

The past couple of years have reminded us of how precarious our finances can be when things change. The war in Ukraine has unfortunately contributed to a spike in fuel, food and other prices that has sent UK inflation to a 30-year high.

Rainy-day savings will likely be shrinking, or even vanishing, for many households needing to cover living costs.

Something to fall back on

It can take years of hard work and dedication to build up your emergency funds, but a matter of days or weeks to deplete them. Harriet Shepherd, who runs SJP’s Workplace Financial Education programme, says:

“The recommended amount of savings for an emergency fund is three to six months’ expenditure, and that can act as a buffer between jobs and to see you through higher living costs.”

Sadly, it only takes one unfortunate event – like illness or an accident that prevents you from working – to jeopardise your income. This is why protection insurance policies, such as income protection and critical illness insurance, are so invaluable.

Types of insurance

Income protection insurance helps cover outgoings such as mortgage repayments, rent, bills and other household essentials in the event that you’re unable to work because of illness or an accident. It typically pays out between 50% and 65% of your income after a pre-agreed deferral period (usually three to six months) has passed, and most policies will do so for as long as needed.

Meanwhile, critical illness insurance pays out a lump sum on the diagnosis of certain specified critical illnesses or medical conditions.

Yet, almost eight in ten have no income protection insurance in place, while 75% have no critical illness cover, according to the most recent Scottish Widows UK Household Finance Index.1

Generally, we’re more likely to take out insurance on material goods, such as mobile phones and household contents, than we are to protect against the income that pays for these life essentials. Harriet points out:

“Protecting yourself, your standard of living, and your health is far more valuable than protecting your material possessions. The impact of losing an income is so much greater. If you’re the main household earner, it can have a huge impact on yourself and your family if you aren’t able to work.

“The question isn’t whether to get protection insurance, but whether you can afford to live without it in the event of not being able to work. This is especially the case if you’re self-employed and don’t have any of the cover or benefits that an employer might provide.”

1 Scottish Widows UK Household Finance Index, Scottish Widows, April 2022 (Based on a survey sample size of 4,500).

In The Picture

The below is on the basis that any tax relief over the basic rate is claimed via your annual tax return.

The Last Word

“Free speech is the bedrock of a functioning democracy, and Twitter is the digital town square where matters vital to the future of humanity are debated.”

– Elon Musk describes the importance he places on Twitter, as his $44 billion dollar acquisition of the company is announced.

The information contained is correct as at the date of the article.

Artemis is a fund manager for St. James’s Place.

The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place or Wellesley Wealth Advisory.

Source: London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). ©LSE Group 2022. FTSE Russell is a trading name of certain of the LSE Group companies.

“FTSE Russell®” is a trademark of the relevant LSE Group companies and is used by any other LSE Group company under license. All rights in the FTSE Russell indexes or data vest in the relevant LSE Group company which owns the index or the data. Neither LSE Group nor its licensors accept any liability for any errors or omissions in the indexes or data and no party may rely on any indexes or data contained in this communication. No further distribution of data from the LSE Group is permitted without the relevant LSE Group company’s express written consent. The LSE Group does not promote, sponsor or endorse the content of this communication.

© S&P Dow Jones LLC 2022; all rights reserved.