August 2, 2022/United Capital Research
The International Monetary Fund (IMF) released its Jul-2022 World Economic Outlook Update highlighting the downward revision of global and regional growth forecasts in its baseline scenario. The IMF estimates that global growth would be 3.2% in 2022 and then moderate to 2.9% in 2023. This is a 40bps and 70bps downward revision from its April forecasts. Growth projection for Advanced Economies was revised downward by 0.8ppt and 1.0ppt for 2022 and 2023 respectively to 2.5% and 1.4%. On the other hand, Emerging Markets and Developing Economies 2022 and 2023 growth projections were revised to 3.6% and 3.9%, a 0.2ppt and 0.5ppt reduction. Sub-Saharan Africa’s projections remained unchanged at 3.8% and 4.0% respectively.
The primary driver identified by the IMF for the downward revisions include the increase in energy costs, unabating inflation pressures (due to rising food and energy prices) and the economic cost of reducing inflation. First, rising prices imply it is becoming more expensive for consumers to maintain their standard of living, which would consequently lead to a reduction in consumer demand. In addition, rising interest rates imply it becomes more expensive to service credit card payments and mortgages which would contribute to reducing global demand. On the corporate side, rising input cost, weaker consumer demand and higher cost to access credit are all factors that are likely to slow business investments and consequently economic growth. Thus, it is broadly justified for the IMF to cut its growth forecasts for the year. However, we disagree with the magnitude of reduction by the IMF and still consider their estimates optimistic.
Surprisingly, Nigeria’s 2022 growth projection was left unchanged at 3.4% while 2023 projections grew 10bps to 3.2%, forecasts we consider extremely optimistic. The low base of 2020 was the primary support for a 3.4% GDP growth in 2021 and with normalcy returning, we struggle to see Nigeria hitting those heights in 2022. High inflationary pressures will continue to hurt consumer pockets while FX illiquidity will continue to hamper the manufacturing sector. In addition, the high-interest rate environment would make borrowing unfavourable in the medium term. We have a 2.9% output growth forecast for Nigeria in 2022.
