By Clara Nwachukwu, Washington DC
The International Monetary Fund (IMF), yesterday lowered its global economic growth forecast for this year to 2.8%, but expected it to rise modestly to 3.0% by 2024.
In its latest World Economic Outlook (WEO) published on Tuesday, the IMF expects that most countries will avoid a recession this year despite economic and geopolitical concerns.
This is because global inflation is already falling; signalling that the tightening of monetary policy through major interest rate rises is bearing fruit, though more slowly than initially anticipated.
IMF Chief Economist, Pierre-Olivier Gourinchas, at a press briefing ahead of the release of the WEO report, said: “The global economy is recovering from the shocks of the last few years, and particularly of course the pandemic, but also the Russian invasion of Ukraine,”
Despite this optimism, the Outlook forecast growth to slow in both the short and medium terms, as the world economy is still recovering from the unprecedented crises of the last three years of the pandemic, and the recent banking turmoil has increased uncertainties.
While global growth is expected to fall from 3.4% last year to 2.8% in 2023 before rising to 3% in 2024, global inflation to slow to 7.0% this year, down from 8.7% last year
He said the gradual global recovery from both the pandemic and Russia’s invasion of Ukraine “remains on track”, with China’s reopened economy rebounding strongly, while previously disrupted supply chains are unwinding.
The situation remains fragile. Once again, downside risks dominate and the fog around the world economic outlook has thickened.
Gourinchas said this year’s economic slowdown is concentrated in advanced economies, especially the Eurozone and in the United Kingdom, “where growth is expected to fall to 0.8% and -0.3% this year before rebounding to 1.4 and 1% respectively.”
In contrast, the report projects more positive outlook among emerging market economies, with China forecast to grow by 5.2% this year.
He also warned that the recent instability triggered by the collapse of Silicon Valley Bank and others, shows “the situation remains fragile. Once again, downside risks dominate and the fog around the world economic outlook has thickened.”
Accordingly, policymakers will have a narrow path to follow to bring down prices while avoiding a recession and maintaining financial stability, noting that as long as financial stress is not systematic, the first priority for central banks is fighting inflation.
He said inflation was still stubbornly high, more than expected by the markets, while falling inflation was mainly due to falling energy and food prices.
“We expect year-end to year-end core inflation will slow to 5.1% this year, a sizeable upward revision of 0.6 percentage points from our January update, and well above target,” said Gourinchas.
He said that labour markets – reflected in low unemployment rates – “remain very strong in most advanced economies”, which “may call for monetary policy to tighten further or to stay tighter for longer than currently anticipated.”
He said he remained “unconvinced” that there was a big risk of an uncontrolled wage-price spiral, with nominal wage gains continuing to lag behind price increases, implying a decline in real wages.
He said more worrying were the side effects that the sharp interest rate rises of the last year were having on the financial sector, “as we have repeatedly warned might happen. Perhaps the surprise is that it took so long.”
He concluded by warning that a sharp tightening of global financial conditions due to a so-called ‘risk-off’ event, when investors rush to play safe and sell assets, “could have a dramatic impact on credit conditions and public finances, especially in emerging markets and developing economies.
“It would precipitate large capital outflows, a sudden increase in risk premia, a dollar appreciation in a rush to safety, and major declines in global activity amid lower confidence, household spending and investment.”