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%.

Data issued by the Statistical Center for the Cooperation Council for the Arab Countries of the Gulf (GCC-Stat) indicate that the financial risks of the GCC countries will be low in the short term amid forecasts of stable or declining interest rates locally and globally.

The reports issued by Credit rating agencies also signaled an improvement in the sovereign bond rating of the GCC countries in 2023. It is also expected that the credit attractiveness of GCC countries will increase, which would allow for the rescheduling of their public debts at lower financial costs.

According to the estimates of the GCC-Stat, the public debt of the GCC countries is expected to stabilize at 28% of the GCC countries’ GDP during the years 2024 and 2025. The financial budget reform plans, which are based on improving the efficiency of public spending and programs to stimulate growth in non-oil sectors, would contribute to achieving a balance between maintaining the economic growth rate and the sustainability of public spending.

The data issued by the GCC-Stat also reveal that the public debt of the GCC countries has doubled over the past ten years to reach about $628 billion in 2023, after it was $144 billion in 2014. The volume of debt as a percentage of the GCC Countries’ GDP increased to reach its peak in 2020 at 40.3%, before declining in the following years to reach about 29.8% in 2023.

The total public finances in the GCC countries also recorded a significant deficit during 2014-2021. The highest deficit value was registered in 2015, with an amount of about $158 billion, which accounts for 11.1% of the total GCC Countries’ GDP. In 2020, a deficit of $128 billion was recorded, which represents 8.8% of the total GDP.

The public finances of the GCC countries witnessed a significant financial surplus in 2022 estimated at $134 billion, representing 6.1% of the gross domestic product, followed by a surplus of $2 billion in 2023.

The total public revenues in the GCC developed significantly during the period 2021-2023 to record about $641 billion in 2023. Oil revenues accounted for 62% of public revenues, compared to $723 billion in 2022, of which oil revenues accounted for 67%.

Total public spending in the GCC countries reached its highest levels in 2023, recording about $639 billion. Current spending accounted for 85% of the total public spending, compared to 15% for investment spending in the GCC countries.

IMF: Global Economy on Track