IMF revises 2023 global growth forecast upward to 2.9%

FILE PHOTO: The International Monetary Fund (IMF) logo is seen outside the headquarters building in Washington, U.S. REUTERS/Yuri Gripas/File Photo

KUALA LUMPUR: Global growth is projected to fall to 2.9 per cent this year from an estimated 3.4 per cent in 2022, said the International Monetary Fund (IMF).

However, the IMF said growth is expected to rebound to 3.1 per cent in 2024.

The forecast for 2023 is 0.2 percentage points higher than predicted in its October 2022 World Economic Outlook report but below the 10-year average of 3.8 per cent, it said in its latest economic update.

The IMF said that central banks’ interest rate hikes to combat inflation and the Russia-Ukraine war would continue to weigh on economic activity this year.

During a virtual briefing today, IMF research department director Pierre-Olivier Gourinchas said that global inflation is expected to fall from 8.8 per cent in 2022 to 6.6 per cent in 2023 and to 4.3 per cent in 2024, but this would still be above pre-pandemic (2017 to 2019) levels of about 3.5 per cent.

"The global economy is poised to slow this year, before rebounding next year, (and) growth will remain weak by historical standards, as the fight against inflation and Russia’s war in Ukraine weigh on activity.

"Despite these headwinds, the outlook is less gloomy than in our October forecast, and could represent a turning point, with growth bottoming out and inflation declining,” he said.

Gourinchas said the rapid spread of COVID-19 in China dampened growth in 2022, but its recent reopening has paved the way for a faster-than-expected recovery.

"China's sudden reopening paves the way for a rapid rebound in activity and global financial conditions have improved as inflation pressures started to abate.

"The weakening of the US dollar from its November high provided some modest relief to emerging and developing economies,” he said.

For advanced economies, he said the slowdown will be more pronounced with a decline from 2.7 per cent last year to 1.2 per cent this year, with nine out of 10 advanced economies to see growth decelerate this year.

"The United States' (US) growth will slow to 1.4 per cent in 2023 as the Federal Reserve interest rate hikes work their way through the economy.

"The euro area conditions are more challenging, despite signs of resilience to the energy crisis, a mild winter and generous fiscal support with tightening monetary policy and the negative terms of trade shock due to the increase in the price of its imported energy,” he said.

Gourinchas noted that growth in the region would bottom out at 0.7 per cent, adding that the emerging markets and developing economies have already bottomed out as a group and are expected to experience modest growth at four per cent and 4.2 per cent this year and next.

As for China, he said the growth is projected to rebound to 5.2 per cent in 2023, and together with India will account for half of the global growth this year, while the US and the euro area combined will account for 10 per cent only.

Although risks to the outlook have moderated since October with some positive factors gained in relevance, overall risks would remain tilted to the downside, Gourinchas said.

"China's recovery could stall caused by greater-than-expected economic disruptions from waves of COVID-19 infections, or by a sharper-than-expected slowdown in the property sector.

"Inflation could remain stubbornly high with continued labour market tightness, and growing wage pressures requiring tighter monetary policies.”

He added that the escalation of the war in Ukraine would remain a major threat and could destabilise energy and food markets and further fragment the global economy.

"A sudden repricing in financial markets could tighten financial conditions, especially in emerging markets and developing economies,” he said.

On the upside, Gourinchas said strong household balance sheets and solid wage growth could help sustain private demand although these may potentially complicate the fight against inflation.

Meanwhile, he said that easing supply chain bottlenecks and labour market cooling due to falling vacancies could allow for a softer landing, requiring less monetary tightening.

He also noted that the recent news about inflation would be encouraging but the battle is far from won with the monetary policy starting to bite, coupled with a slowdown in new home construction in many countries.

"Yet inflation-adjusted interest rates remain low or even negative in the euro area and other economies. And there is significant uncertainty about both the speed and effectiveness of monetary tightening.

"While the inflation pressures remain elevated, central banks need to raise real policy rates above a neutral stance and keep them there until underlying inflation is on the decisive declining path (and) easing too early risks undoing most of the gains achieved so far,” he opined.

Gourinchas said the financial environment would remain fragile, especially as central banks embark on an uncharted path toward shrinking their balance sheets.

It would be important to monitor the buildup of risks and address vulnerabilities especially in the housing sector or in the less regulated non-bank financial sector, he noted.

"Emerging market economies should let their currencies but just as much as possible in response to the tighter global monetary conditions using foreign exchange interventions or capital flow management to smooth excessive and non-fundamental volatility, where appropriate,” he viewed.

As for the rising cost of living, he said many countries have responded to the crisis by supporting people in business with broad and untargeted policies that would help cushion the shock.

"(However), many of these measures proved costly and increasingly unsustainable.

"Countries should instead adopt targeted measures that conserve fiscal space, allow high energy prices to reduce demand for energy, and avoid overly stimulating the economy,” he said.

Additionally, he said supply-side policies have a role to play as they could help remove key growth constraints, improve resilience in price pressures and foster the green transition.

This would help alleviate accumulated output losses since the beginning of the pandemic, especially for emerging and low-income economies, he added. - Bernama

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