Improved economic outlook, but growth still ‘subpar’
In its World Economic Outlook Update, the IMF said that while the fight against inflation is starting to pay off, central banks must continue their efforts.
Pierre-Olivier Gourinchas, chief economist at the IMF, added that while the global economy is poised to slow this year, before rebounding next year, overall growth will remain weak by historical standards as the fight against inflation and Russia’s war in Ukraine weigh on activity.
But despite these headwinds, the latest outlook is less downbeat than the IMF’s October 2022 forecast. This, said Gourinchas, could “represent a turning point, with growth bottoming out and inflation declining”. As a result, the IMF has slightly increased its 2022 and 2023 growth forecasts. It expects global growth to slow from 3.4% in 2022 to 2.9% in 2023 then rebound to 3.1% in 2024. The forecast for 2023 is 0.2 percentage point higher than predicted in the October 2022 World Economic Outlook but below the historical (2000–19) average of 3.8%.
The IMF pegs this improved forecast on “surprisingly resilient” economic growth in the third quarter of 2022, with “strong labour markets, robust household consumption and business investment, and better-than-expected adaptation to the energy crisis in Europe”. Inflation also showed improvement. Of specific note was China’s re-opening, which is expected to pave the way for a rapid rebound in activity.
However, advanced economies are expected to fare worse than developing ones. Here, the slowdown is described as “more pronounced”, dropping from 2.7% last year to 1.2% and 1.4% in 2023 and 2024 respectively. In all, nine out of 10 advanced economies are expected to decelerate.
For the US, growth is predicted to drop to 1.4% in 2023, while conditions in the Eurozone look more challenging with growth expected to bottom out at 0.7% this year.
Contrastingly, as a group, emerging market and developing economies have already bottomed out. Here, growth is expected to rise slightly to 4% and 4.2% in 2023 and 2024.
Of these, India remains “a bright spot”, said Gourinchas. “Together with China, it will account for half of global growth this year, versus just a tenth for the US and euro area combined.”
Overall, global inflation is expected to decline this year but, crucially, by 2024, projected average annual headline and core inflation will still be above pre-pandemic levels in more than 80% of countries, said the IMF. It is expected to fall from 8.8% in 2022 to 6.6% in 2023 and 4.3% in 2024, still above pre-pandemic (2017–19) levels of about 3.5%.
While risks to the forecast are not as severe as previously advised, they remain “tilted to the downside”.
Front and centre is the concern that China’s recovery could stall amid greater-than-expected economic disruptions from current or future waves of Covid-19 infections or a sharper-than-expected slowdown in the property sector.
Another risk is that inflation remains stubbornly high on the back of continued labour tightness and wage pressures. An escalation of the war in Ukraine is another major threat to global stability and one that could “destabilise energy or food markets and further fragment the global economy”, said the IMF.
On the upside, an easing of supply chain bottlenecks and a cooling of labour markets could lead to a softer landing, requiring less monetary tightening.
“The inflation news is encouraging, but the battle is far from won,” said Gourinchas. “Monetary policy has started to bite, with a slowdown in new home construction in many countries. Yet, inflation-adjusted interest rates remain low or even negative in the euro area and other economies, and there is significant uncertainty about both the speed and effectiveness of monetary tightening in many countries.”
He described the financial environment as remaining “fragile”, especially as central banks embark on an “uncharted path toward shrinking their balance sheets”.
Gourinchas advised that supply side policies have a role to play in economic recovery. “They can help remove key growth constraints, improve resilience, ease price pressures, and foster the green transition. These would help alleviate the accumulated output losses since the beginning of the pandemic, especially in emerging and low-income economies.”
Industry must also counter growing geoeconomic fragmentation. “We must buttress multilateral co-operation, especially on fundamental areas of common interest such as international trade, expanding the global financial safety net, public health preparedness and the climate transition.”
Stronger multilateral co-operation is essential to preserve the gains from the rules-based multilateral system and to mitigate climate change by limiting emissions and raising green investment, said the IMF.
In summary, Gourinchas said that while the global economic outlook hasn’t worsened, it is not enough. “The road back to a full recovery, with sustainable growth, stable prices, and progress for all, is only starting.”
Source: Baltic Exchange