Take Two: IMF warns of growth hit from fragmentation, weak demand weighs on factory activity

What do you need to know?

Geopolitical tensions, barriers to international investment and the reconfiguration of supply chains could lead to a long-term reduction of global GDP of around 2%, the International Monetary Fund (IMF) has warned. In its World Economic Outlook, the IMF said Brexit, US/China trade tensions and the Ukraine war could lead to a reversal of global economic integration, a process it calls “geoeconomic fragmentation”. It said that although the redirection of supply chains to preferred trade partners - friendshoring – could strengthen domestic security and help maintain a technological advantage, it may also make countries more vulnerable to macroeconomic shocks. The loss of foreign direct investment could be especially severe for some developing economies, it said.

Around the world

Weak global demand and high inflation negatively impacted factory activity in some of the world’s largest economies in March. In the US, the ISM manufacturing Purchasing Managers’ Index (PMI) fell to 46.3 from 47.7 in February – slightly below market expectations and a near three-year-low. The S&P Global measure was more positive, rising to 49.2 in March from 47.3 – but still below the 50 level that indicates contraction. The Eurozone manufacturing PMI fell to a four-month low of 47.3, while Chinese factory activity also lost momentum in March, with the Caixin manufacturing PMI, a closely watched private measure, falling to 50 from 51.6 in February. By contrast, services PMIs remain in expansionary territory suggesting robust growth in the Eurozone and China service sectors.  

Figure in focus: ¥15trn

Japan aims to triple sales of semiconductors made in the country to ¥15trn by 2030, its industry ministry announced last week. The goal is largely seen as an effort to enhance the country’s position in the global semiconductor market while securing a stable supply. Meanwhile, Japan is expected to spend $7bn on new chipmaking equipment in 2024, an increase of 82% from this year - the biggest spending jump in the world, according to SEMI, the global semiconductor industry association. Japan also recently announced further export restrictions for its chip manufacturing equipment to countries including China, which will take effect in July.

Words of wisdom:

Speed limit: The idea that growth can only run at a certain rate before being threatened by inflation. In other words, a country has a limited capacity to grow before shortages of goods and services will cause prices to rise too sharply. Central banks seek to measure the speed limit, or potential growth of an economy. Central bank policy attempts to maintain the difference between actual and potential economic growth - the output gap – to keep inflation at target levels. The World Bank recently suggested that without concerted efforts to boost productivity and investment, the global economy’s speed limit was set to hit a three-decade low by 2030.

What’s coming up

Brazil and China’s inflation numbers for March are posted on Tuesday; in February China’s annual inflation rate fell to 1% from 2.1% in the prior month. India and the US follow with their own inflation data on Wednesday – annual US inflation eased to 6% in February, its lowest since September 2021, and down from 6.4% in January. On the same day the minutes from the latest Federal Open Market Committee meeting are published and the Bank of Canada convenes to decides on interest rates – at its last meeting it held its target overnight rate at 4.5%. Australia reports its unemployment numbers on Thursday while Spain and France update with their respective inflation numbers on Friday.