The global economic outlook is less pessimistic than it appeared to be a few months ago, but it is not time to be overly optimistic, International Monetary Fund managing director Kristalina Georgieva said in Davos.
“It is less bad than we feared a couple of months ago, but less bad doesn’t quite yet mean good,” Ms Georgieva said on Friday, at a panel discussion at the World Economic Forum Annual Meeting.
On the global growth outlook, the IMF chief said there are positive signs.
“Inflation seems to have started leaning in the right direction, in other words, down, headline inflation in particular,” she said.
Ms Georgieva expects the recent reopening of China to have a positive impact on global growth. The IMF now expects China’s economy to grow 4.4 per cent this year.
“Now, with the reopening of China, we expect growth this year to again exceed the global average,” she said.
“Under the current circumstances, a big upward revision [in outlook] can’t be expected. However, no downward revision itself is a positive news.”
Last year, the IMF downgraded the global economic outlook three times.
In October, the Washington-based lender cut its global economic growth forecast to 2.7 per cent for 2023, which was 0.2 percentage points lower than its July forecast.
“This may be corrected somewhat in a couple of days,” Ms Georgieva said.
On January 31, the fund will release its latest World Economic Outlook report.
However, the IMF chief warned that there will be no dramatic upward revision from its most recent growth outlook, reminding the panel that the global economy continues to face risks from elevated levels of inflation, the energy crisis and the geopolitical situation.
Her message to business and policymakers was to “be careful not to get on the other side of the spectrum from being too pessimistic to being too optimistic. Stay in the middle of realism that seems to serve the world well”.
Christine Lagarde, President of the European Central Bank, said the views from around the world reflect a sense of relief and optimism.
“The situation around the world must be improving a little bit, if you hear so many competent, talented economists say, ‘not as bad as feared',” Ms Lagarde told the panel.
The ECB chief said there has been an overall shift in views on the prospects of economies around the world.
“Our economies and key players are moving from defence mode, which they had been in collectively, sometimes in 2021 and certainly in 2022, to competition mode. Clearly, something must be getting better, and certainly better than what we feared initially,” she said.
Despite the potential positive impact of the resurgence in Chinese economic growth on the global economy, the panellists warned that it comes with risk of elevated inflation and consequent monetary tightening further hurting growth.
“Opening of China comes with the prospect of higher inflationary pressures transmitted through Chinese energy demand pushing up prices,” said Ms Georgieva.
While a full-blown recession has not materialised yet, all panellists urged caution from policymakers on framing right monetary and fiscal policies to help balance growth and inflation targets.
“The biggest tragedy for the global economy at the moment will be if the central banks are to walk away from inflation control measures. If we don’t set it right, now, we will end up fighting inflation twice,” said Lawrence Summers, Charles W. Eliot University professor at the Harvard Kennedy School of Government.
Emphasising the need for a balanced approach in monetary policy for keeping inflation at bay, Ms Lagarde said “our approach is to stay the course”, while urging central banks to continue the battle against inflation, but in a “more subtle” way than they had in 2022.
She also urged governments to be more cautious about their fiscal policies that will work against the monetary policy objectives of the central banks.
While emphasising the need to keep inflation in check Ms Georgieva warned that too high interest rates for too long can hurt job creation. She said her biggest note of caution was that labour markets could lose some of their current tightness, with interest rates yet to significantly bite.
“If they bite more severely, then we can see unemployment going up. And it is very different for a consumer to have a cost-of-living crisis and a job, than to have a cost-of-living crisis and no job,” she said.
“So, we have to be thinking of possibly unemployment going up at a time when fiscal space in governments is very tight … there isn’t that much they can do to help people. And yet they would be pressed to do it.”
The panellists also warned against global economic fragmentation and the re-emergence of protectionism, saying they were major threats to the global growth outlook.
Trade should be kept free and open and technologies that make life better and sustainable should be equitably shared among nations, said Mr Summers.