IMF says global economy faces 'rocky' recovery

Washington-based lender says inflation is slowly falling but GDP growth remains historically low while financial risks have increased

The International Monetary Fund building in Washington. The fund has lowered its global economic growth estimate for this year. EPA
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The global economy faces a "rocky" recovery as geopolitics, monetary tightening and inflation continue to weigh on growth, the International Monetary Fund has said.

Inflation is beginning to decline while the reopening of China, the world's second largest economy, is supporting global growth and supply chains are improving. Additionally, while the recovery from the Ukraine war and the Covid-19 pandemic is on track — the rebound across countries is fragmented, the Washington-based lender said in its World Economic Outlook report released on Tuesday.

The fund lowered its global economic growth estimate for this year by 0.1 percentage points to 2.8 per cent, from what it previously projected in January, with the estimate below the 3.4 per cent expansion recorded in 2022 and the historical growth average of 3.8 per cent over the 2000-2019 period.

The global economy is projected to grow 3 per cent in 2024, a 0.1 percentage point decline from the previous estimate.

Five year-ahead growth forecasts declined steadily to 3 per cent in 2023, from 4.6 per cent in 2011.

This reflects the slowdown of previously rapidly growing economies such as China and South Korea, as well as the impact of the Covid-19 pandemic, a slower pace of structural reforms and the rising threat of geoeconomic fragmentation leading to more trade tension, less direct investment and a slower pace of innovation and technology adoption across fragmented “blocs”.

“Below the surface … turbulence is building, and the situation is quite fragile, as the recent bout of banking instability reminded us,” said IMF chief economist Pierre-Olivier Gourinchas.

“Inflation is much stickier than anticipated even a few months ago. While global inflation has declined, that reflects mostly the sharp reversal in energy and food prices. But core inflation, excluding the volatile energy and food components, has not yet peaked in many countries.”

Advanced economies will be the main drag on the global economy this year, with growth expected to fall to 1.3 per cent this year before rebounding to 1.4 per cent in 2024, after expanding 2.7 per cent in 2022.

The US, the biggest of the group, is forecast to expand by 1.6 per cent in 2023, instead of 1.4 per cent as previously projected and lower than the 2.1 per cent growth recorded last year. Its economy is projected to expand 1.1 per cent in 2024.

The US Federal Reserve raised interest rates seven times last year to curb inflation, which hit a four-decade high, and raised them twice this year amid financial turmoil that led to the collapse of three lenders and triggered a crisis of confidence in banks.

The euro area, which includes 20 EU countries that use the euro as their primary currency, is forecast to grow 0.8 per cent in 2023, 0.1 percentage points higher than the earlier estimate in January, following a 3.5 per cent expansion in 2022 — due to the European Central Bank tightening monetary policy and the increase in the price of its imported energy.

Inflation in the eurozone dropped to 6.9 per cent in March but core costs increased to a high of 5.7 per cent, according to preliminary Eurostat figures.

Germany, Europe's largest economy, is now set to contract 0.1 per cent this year, instead of a 0.1 per cent expansion, as high inflation continues to weigh on consumption. Its economy grew by about 1.8 per cent last year.

France, the euro area's second-largest economy, remains unchanged, with its growth forecast at 0.7 per cent in 2023, following a 2.6 per cent expansion in 2022.

Japan, the world's third-largest economy, which removed restrictions on foreign visitors, is now projected to grow 1.3 per cent in 2023, compared with a previous 1.8 per cent estimate, after growing by about 1.1 per cent in 2022.

The UK, which slipped a notch to become the world's sixth-largest economy due to an economic crisis last year that drove the pound to its lowest level against the US dollar, is expected to shrink 0.3 per cent in 2023, instead of the previous estimate of a 0.6 per cent contraction.

Its economy is estimated to have grown 4 per cent in 2022. UK inflation unexpectedly jumped in February to 10.4 per cent as food and energy prices continued to rise and weigh on growth.

Th economy of Switzerland, which had to reckon with its own banking crisis that led to a shotgun wedding of Credit Suisse with rival UBS last month, will grow 0.8 per cent this year after a 2.1 per cent expansion in 2022.

In contrast to the world's biggest economies, emerging market and developing peers are expected to grow 3.9 per cent in 2023.

The growth estimate for China remains unchanged at 5.2 per cent in 2023, following a 3 per cent expansion in 2022, as it benefits from a full reopening this year.

India, which overtook the UK to become the world's fifth-largest economy in 2022, is expected to outpace the world's economies with a 5.9 per cent expansion in 2023, after growing 6.8 per cent last year.

The Middle East and Central Asia are forecast to grow by 2.9 per cent, instead of 3.2 per cent as previously projected, following a 5.3 per cent expansion in 2022, before picking up to 3.5 per cent in 2024.

Saudi Arabia, the Arab world’s largest economy, is forecast to grow 3.1 per cent this year and the next, instead of 2.6 per cent estimate as previously projected, following an 8.7 per cent expansion in 2022.

The kingdom, the world's largest exporter of oil, benefitted from the rally in crude prices last year.

Oil prices are projected to fall by about 17.3 per cent in 2023, with the assumed average price per barrel, based on futures markets, at $73.13 in 2023 and $68.90 in 2024, compared with $96.36 in 2022, the IMF said.

World trade growth is expected to decline this year to 2.4 per cent, despite an easing of supply bottlenecks, before rising to 3.5 per cent in 2024, after growing by 5.1 per cent in 2022.

Global inflation will decrease to 7 per cent this year and 4.9 per cent in 2024, from 8.7 per cent in 2022. This is still above the preferred 2 per cent target of central banks.

The sharp monetary tightening by central banks over the past year “is starting to have serious side effects for the financial sector”, Mr Gourinchas said.

Critics of the Fed and other major central banks have blamed the regulators for acting too slow initially and then too aggressively later as they raised interest rates by the most since 2007 to fight inflation.

Many fault the central banks following a decade and a half of near-zero interest rates, followed by aggressive monetary tightening, which they say helped to stoke financial turmoil in the US, leading to the collapse of three medium-sized banks.

“Following a prolonged period of muted inflation and extremely low interest rates, last year’s rapid tightening of monetary policy has triggered sizeable losses on long-term fixed-income assets. The stability of any financial system hinges on its ability to absorb losses without recourse to taxpayers’ money,” Mr Gourinchas said.

He cited the financial instability and decline in UK government bonds last year and the recent banking turbulence in the US.

These examples “illustrate that significant vulnerabilities exist both among banks and non-bank financial institutions”, Mr Gourinchas said.

“In both cases, the authorities took quick and strong action and have been able to contain the spread of the crisis so far. Yet, the financial system may well be tested again.”

Downside risks remain and financial institutions with excess leverage, credit risk or interest rate exposure, as well too much dependence on short-term funding, or with limited fiscal space could become the next target, he said.

The same applies to countries with weaker perceived fundamentals.

“We are therefore entering a perilous phase during which economic growth remains low by historical standards and financial risks have risen, yet inflation has not yet decisively turned the corner,” Mr Gourinchas said.

“More than ever, policymakers will need a steady hand and clear communication.”

Regulators and supervisors should actively manage market strains and strengthen oversight, he said.

“A fragmented world is unlikely to achieve progress for all or to allow us to tackle global challenges such as climate change or pandemic preparedness. We must avoid that path at all costs.”

Updated: April 13, 2023, 4:12 AM