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%.
