Episode Details

Back from the IMF Spring Meetings in Washington, Simon Waever and Seth Carpenter unpack what policy makers and investors could be underpricing: the growth hit from higher energy costs, the risk of too much tightening by central banks and why emerging markets still look resilient.

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Simon Waever: Welcome to Thoughts on the Market. I'm Simon Waever, Morgan Stanley's Global Head of Emerging Markets Sovereign Credit and LatAm Fixed Income Strategy. 

Seth Carpenter: And I'm Seth Carpenter, Global Chief Economist and Head of Macro Research. 

Simon Waever: Today: The key takeaways for investors from the International Monetary Fund spring meetings in Washington, D.C. 

It’s Tuesday, April 21st at 10am in New York. 

Every six months, the IMF meetings in D.C. bring policy makers and investors together to take stock of the global economy. And we were both there as part of our IMF policy pulse conference. 

This time, continuing a pattern of recent years, the backdrop was a bit more complicated. Investors are weighing the economic fallout from the Iran conflict, potentially more persistent inflation pressures, and, as always, rising concerns around global debt and fiscal sustainability. So, the key question coming out of Washington is how do these risks reshape the outlook, and what should investors be paying attention to now.

Let's start with the growth outlook, Seth. When you think about the Iran conflict, what's the single biggest channel through which it could hit global growth? And is that risk underpriced by markets today? 

Seth Carpenter: I think it really is underpriced, and not just by markets. I would say I had conversations with investors, but also with policy makers down in Washington. And I would say relative to my views on things, both markets and policy makers are under appreciating how much of a hit to growth this could be. Where is it going to happen? What's the channel? 

Well, that actually – that differs depending on which economy that you're looking at. I would say here in the U.S., it's primarily the middle- and lower-end of the income distribution. Higher energy prices, gasoline prices going up, taking away at discretionary income, especially in what we've been calling this K-shaped economy where the bottom half is already struggling. So, a bit of a hit primarily to consumption spending. 

I'd say in other parts of the world, it's broader. Asia – we are already starting to see rationing being imposed for production, for public transportation in lots of ways that really are going to crimp spending both by households and businesses. And then of course Europe. Well, they're still in some ways reeling and adapting from the energy price shock. When Russia invaded Ukraine, natural gas prices went up a lot more then. But I think there's still an adjustment process going on. 

So, I think the potential hit to growth is real. I think it has spread across economies around the world, but each different economy, each different country has its own sort of nuance and flavor to it. 

Simon Waever: And what about the central banks? I know you met with quite a few of them as well. Are they at risk of being behind the curve on inflation or is actually the bigger mistake now look like over-tightening? 

Seth Carpenter: Yeah, I really think the over-tightening is the bigger risk here. It's funny, being behind the curve. That's a phrase that I did hear a lot, especially among some of the European policy makers. And people are feeling scarred, I guess you could say, from the surge in inflation that we got coming out of COVID. But history suggests t