IMF Forecasts Global Economic Growth to Rise Modestly to 3% Next Year

By: Alexis Rubinstein, Managing Editor - Coffee Network

Tue, 11 Apr 2023, 13:32

Alexis Rubinstein

Managing Editor

CoffeeNetwork (New York) – In their latest Global Outlook, the International Monetary Fund (IMF) has said that inflation is slowly falling, but economic growth remains historically low and financial risks have risen.

The global economy’s gradual recovery from both the pandemic and Russia’s invasion of Ukraine remains on track. China’s reopened economy is rebounding strongly. Supply chain disruptions are unwinding, while dislocations to energy and food markets caused by the war are receding. Simultaneously, the massive and synchronized tightening of monetary policy by most central banks should start to bear fruit, with inflation moving back towards targets.

IMF forecasts that growth will bottom out at 2.8 percent this year before rising modestly to 3 percent next year—0.1 percentage points below our January projections. Global inflation will fall, though more slowly than initially anticipated, from 8.7 percent last year to 7 percent this year and 4.9 percent in 2024.

This year’s economic slowdown is concentrated in advanced economies, especially the euro area and the United Kingdom, where growth is expected to fall to 0.8 percent and -0.3 percent this year before rebounding to 1.4 and 1 percent respectively. By contrast, despite a 0.5 percentage point downward revision, many emerging market and developing economies are picking up, with year-end to year-end growth accelerating to 4.5 percent in 2023 from 2.8 percent in 2022.

The IMF expects year-end to year-end core inflation will slow to 5.1 percent this year, a sizeable upward revision of 0.6 percentage points from our January update, and well above target.

The World Economic Outlook explores a scenario where banks, faced with rising funding costs and the need to act more prudently, cut down lending further. This leads to an additional 0.3 percent reduction in output this year.

Yet, the financial system may well be tested even more. Nervous investors often look for the next weakest link, as they did with Crédit Suisse, a globally systemic but ailing European bank. Financial institutions with excess leverage, credit risk or interest rate exposure, too much dependence on short-term funding, or located in jurisdictions with limited fiscal space could become the next target. So could countries with weaker perceived fundamentals.

A sharp tightening of global financial conditions—a so-called ‘risk-off’ event—could have a dramatic impact on credit conditions and public finances, especially in emerging market and developing economies. It would precipitate large capital outflows, a sudden increase in risk premia, a dollar appreciation in a rush to safety, and major declines in global activity amid lower confidence, household spending and investment.

In such a severe downside scenario, global growth could slow to 1 percent this year, implying near stagnant income per capita. We estimate the probability of such an outcome at about 15 percent.

We are therefore entering a tricky phase during which economic growth remains lackluster by historical standards, financial risks have risen, yet inflation has not yet decisively turned the corner.

The latest projections also indicate an overall slowdown in medium term growth forecasts. Five-year ahead growth projections declined steadily from 4.6 percent in 2011 to 3 percent in 2023. Some of this decline reflects the growth slowdown of previously rapidly growing economies such as China or Korea. This is predictable: growth slows down as countries converge. But some of the more recent slowdown may also reflect more ominous forces: the scarring impact of the pandemic, a slower pace of structural reforms, as well as the rising and increasingly real threat of geoeconomic fragmentation leading to more trade tensions, less direct investment and a slower pace of innovation and technology adoption across fragmented ‘blocks.’

Alexis Rubinstein

Coffee

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