IMF: Global Economy on Track

The global economy is headed in the right direction with stronger growth and lower inflation, the International Monetary Fund (IMF) said in a new report published on Tuesday.

But, also, the IMF warned that inflation could rise if the war in Ukraine intensified, citing concern about Russia's withdrawal from the Black Sea grain initiative, or if more extreme temperature increases caused by the El Nino weather pattern pushed up commodity prices.

In the latest update to its World Economic Outlook, the agency said it expects global growth of 3% in both 2023 and 2024. The IMF bumped up its 2023 projections by 0.2 percentage points from its previous estimate three months ago and kept the 2024 outlook unchanged.

Also, it said the rise in central bank policy rates to fight inflation continues to weigh on economic activity, forecasting that global headline inflation would fall to 6.8% in 2023 from 8.7% in 2022, dropping to 5.2% in 2024.

The IMF noted that key to inflation’s persistence will be labor market developments and wage-profit dynamics.

Also, the 2023-2024 growth forecast remains weak by historical standards, well below the annual average of 3.8% seen in 2000-2019, largely due to weaker manufacturing in advanced economies, and it could stay at that level for years.

Inflation: No. 1 Enemy

The IMF raised its 2023 global growth prediction by 0.2 percentage points to 3%, up from 2.8% at its April assessment.

By July, the economic outlook has grown a little brighter: The Covid pandemic is no longer considered a global health crisis, supply chains are flowing more smoothly and economic activity has remained steady amid strong labor markets, the IMF said.

The resolution of the debt ceiling standoff and swift action by regulators to quell banking crises in the United States and Europe helped stem the risks of a broader financial crisis, the IMF said Tuesday, cautioning that “the balance of risks to global growth remains tilted to the downside.”

When looking across the global economy, there are concerns that China’s recovery could slow further, as its debt-laden real estate sector weighs on growth, according to the report.

And there’s also concern that “geoeconomics fragmentation: — where geopolitical ideals could shift economic powers away from globalization and toward a more nationalistic and fractured approach — could disrupt trade, the cross-border movements of money and people and commodity prices.

Key to inflation’s persistence will be labor market developments and wage-profit dynamics, the IMF said.

Still, priority No. 1 is for economies to conquer inflation, Pierre-Olivier Gourinchas, the IMF’s chief economist, said in a statement.

Flexibility and Risks

IMF experts said economic activity in the first quarter of the year proved resilient, but that many challenges still cloud the horizon.

“Global economic activity has proven resilient in the first quarter of this year, leading to a modest upward revision for global growth in 2023,” Gourinchas said. “But global growth remains weak by historical standards.”

He added: “Urgent action is needed to strengthen global cooperation on climate policies, international trade, or debt restructuring, to address common challenges.”

“Inflation could remain high or increase, for instance from an intensification of Russia’s war in Ukraine or extreme weather-related events,” Gourinchas said. “This could require a further tightening of monetary policy and lead to another bout of financial market volatility.”

“We need monetary policy to remain restrictive until there are clear signs that underlying inflation is cooling,” he said.

The IMF said Saudi Arabia achieved a 1.9% GPD growth in 2023. It forecasted a 2.8% in 2024.

Meanwhile, overall growth in the Middle East and Central Asia region is projected to decline to 2.5% in 2023, from 5.4% last year, the IMF said.

Poor Growth in Emerging Markets

The IMF projected that a large share of growth in 2023 will come from emerging markets and developing economies, with "broadly stable" growth of 4 to 4.1% in 2023 and 2024 respectively.

It raised its outlook for the United States, the world's largest economy, forecasting growth of 1.8% in 2023 versus 1.6% in April as labor markets remained strong.

Euro zone countries are expected to grow 0.9% in 2023 and 1.5% in 2024, both up 0.1% from April.

Japan's growth was also revised upward by 1.4% in 2023, but the IMF left its outlook for 2024 unchanged at 1.0%.

Oil prices traded flat on Thursday as investors eye developments in the Middle East and more details on China's stimulus plans, and await the release of official US oil inventory data.
Brent crude futures were down 4 cents to $74.18 a barrel by 0648 GMT, while US West Texas Intermediate crude futures were at $70.37 a barrel, down 2 cents.
Both benchmarks settled down on Wednesday, closing at their lowest levels since Oct. 2 for a second day in a row, said Reuters.
The benchmarks are down 6-7% so far this week after the Organization of the Petroleum Exporting Countries (OPEC) and the International Energy Agency cut demand forecasts for 2024 and 2025.
Prices have also fallen as risk premiums have cooled with fears having eased that a retaliatory attack by Israel on Iran could disrupt oil supplies, though uncertainty remains over conflict in the Middle East.
"We are now playing a waiting game for two things. Firstly, the China NPC (National People's Congress) standing committee to flesh out the details and the size of the fiscal stimulus package which I believe is coming," Tony Sycamore, IG market analyst in Sydney, said.
Investors are waiting for further details from Beijing on its broad plans announced on Oct. 12 to revive its ailing economy.
China said on Thursday it would expand a "white list" of housing projects eligible for financing and increase bank lending for such developments to 4 trillion yuan ($562 billion) as it aims to shore up its ailing property market.
Sycamore said Israel's response to Iran's recent attack was the second major focus for the market.
"It's coming, we know that but we don't know when," he said, adding that both factors created upside risks for crude oil prices.
In Iran, the authorities are working to control an oil spill off Kharg Island, the country's IRNA news agency reported on Wednesday.
"It appears to be unrelated to the Israel-Hamas war, but it drew attention to Iran's oil export facilities," ANZ analysts said in a note.
In the US, crude oil and fuel stocks fell last week, market sources said, citing American Petroleum Institute figures on Wednesday, against expectations of a build-up in crude stockpiles.
Crude stocks fell by 1.58 million barrels in the week ended Oct. 11, the sources said on condition of anonymity. Gasoline inventories fell by 5.93 million barrels, and distillate stocks fell by 2.67 million barrels, they said.
Ten analysts polled by Reuters had estimated on average that crude inventories rose by about 1.8 million barrels in the week to Oct. 11.
"Any signs of weak demand in EIA's weekly inventory report could put further downward pressure on oil prices," ANZ analysts said.
The Energy Information Administration, the statistical arm of the US Department of Energy, will release its data at 11 a.m. EDT (1500 GMT) on Thursday.
Also supporting oil prices, the European Central Bank is likely to lower interest rates again on Thursday, the first back-to-back rate cut in 13 years, as it shifts focus from cooling inflation in the euro zone to protecting economic growth.

IMF: Global Economy on Track