The IMF headquarters, in Washington, on Sept. 4, 2018.Yuri Gripas/Reuters
The International Monetary Fund (IMF) on Tuesday raised its 2023 global growth estimates slightly given resilient economic activity in the first quarter, but warned that persistent challenges were dampening the medium-term outlook.
The IMF in its latest World Economic Outlook said inflation was coming down and acute stress in the banking sector had receded, but the balance of risks facing the global economy remained tilted to the downside and credit was tight.
The global lender said it now projected global real GDP growth of 3 per cent in 2023, up 0.2 of a percentage point from its April forecast, but left its outlook for 2024 unchanged, also at 3 per cent.
The 2023-24 growth forecast remains weak by historical standards, well below the annual average of 3.8 per cent seen between 2000 to 2019, largely owing to weaker manufacturing in advanced economies, and it could stay at that level for years.
“We’re on track, but we’re not out of the woods,” IMF chief economist Pierre-Olivier Gourinchas told Reuters in an interview, noting that the upgrade was driven largely by first-quarter results. “What we are seeing when we look five years out is actually close to 3 per cent, maybe a little bit above 3 per cent. This is a significant slowdown compared to what we had pre-COVID.”
This was also related to the aging of the global population, especially in countries like China, Germany and Japan, he said. New technologies could boost productivity in the coming years, but that in turn could be disruptive to labour markets.
The outlook is “broadly stable” in emerging market and developing economies for 2023-24, with growth of 4 per cent expected in 2023 and 4.1 per cent in 2024, the IMF said. But it noted that credit availability is tight and there was a risk that debt distress could spread to a wider group of economies.
The world is in a better place now, the IMF said, noting the World Health Organization’s decision to end the global health emergency surrounding COVID-19, and with shipping costs and delivery times now back to prepandemic levels.
“But forces that hindered growth in 2022 persist,” the IMF said, citing still-high inflation that was eroding household buying power, higher interest rates that have raised the cost of borrowing and tighter access to credit as a result of the banking strains that emerged in March.
“International trade and indicators of demand and production in manufacturing all point to further weakness,” the IMF said, noting that excess savings built up during the pandemic are declining in advanced economies, especially in the United States, implying “a slimmer buffer to protect against shocks.”
While immediate concerns about the health of the banking sector – which were more acute in April – had subsided, financial sector turbulence could resume as markets adjust to further tightening by central banks, it said.
The impact of higher interest rates was especially evident in poorer countries, driving debt costs higher and limiting room for priority investments. As a result, output losses compared with prepandemic forecasts remain large, especially for the world’s poorest nations, the IMF said.
The IMF forecast that global headline inflation would fall to 6.8 per cent in 2023 from 8.7 per cent in 2022, dropping to 5.2 per cent in 2024, but core inflation would decline more gradually, reaching 6 per cent in 2023 from 6.5 per cent in 2022 and easing to 4.7 per cent in 2024.
Mr. Gourinchas told Reuters it could take until the end of 2024 or early 2025 until inflation came down to central bankers’ targets and the current cycle of monetary tightening would end.
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 Niño weather pattern pushed up commodity prices. That in turn could trigger further rate hikes.
The IMF said world trade growth is declining and will reach just 2 per cent in 2023 before rising to 3.7 per cent in 2024, but both growth rates are well below the 5.2 per cent clocked in 2022.
The IMF raised its outlook for the United States, the world’s largest economy, forecasting growth of 1.8 per cent in 2023 compared with 1.6 per cent in April as labour markets remained strong.
It left its forecast for growth in China, the world’s second-largest economy, unchanged at 5.2 per cent in 2023 and 4.5 per cent in 2024. But it warned that China’s recovery was underperforming, and a deeper contraction in the real estate sector remained a risk.
The fund cut its outlook for Germany, now forecast to contract 0.3 per cent in 2023 compared with a 0.1-per-cent contraction in April, but sharply upgraded its forecast for the U.K., now expected to grow 0.4 per cent compared with a 0.3-per-cent contraction forecast in April.
Euro zone countries are expected to grow 0.9 per cent in 2023 and 1.5 per cent in 2024, both up 0.1 of a percentage point from April.
Japan’s growth was also revised upward by 0.1 of a percentage point to 1.4 per cent in 2023, but the IMF left its outlook for 2024 unchanged at 1 per cent.
The rise in central bank policy rates to fight inflation continues to weigh on economic activity, the IMF said, adding that the U.S. Federal Reserve and the Bank of England were expected to raise rates by more than assumed in April, before cutting rates next year.
It said central banks should remain focused on fighting inflation, strengthening financial supervision and risk monitoring. If further strains appeared, countries should provide liquidity quickly, it said.
The fund also advised countries to build fiscal buffers to gird for further shocks and ensure support for the most vulnerable.
“We have to be very vigilant on the health of the financial sector … because we could have something that basically seizes up very quickly,” Mr. Gourinchas said. “There is always a risk that if financial conditions tighten, that can have a disproportionate effect on emerging market and developing economies.”
The IMF said unfavourable inflation data could trigger a sudden rise in market expectations regarding interest rates, which could further tighten financial conditions, putting stress on banks and nonbank institutions – especially those exposed to commercial real estate.
“Contagion effects are possible, and a flight to safety, with an attendant appreciation of reserve currencies, would trigger negative ripple effects for global trade and growth,” the IMF said.
Fragmentation of the global economy given the war in Ukraine and other geopolitical tensions remained another key risk, especially for developing economies, Mr. Gourinchas said. This could lead to more restrictions on trade, especially in strategic goods such as critical minerals, cross-border movements of capital, technology and workers, and international payments.