According to the International Monetary Fund (IMF), the global economy is showing resilience in the face of ongoing challenges such as inflation and a slow recovery in China. This positive outlook raises the likelihood of avoiding a global recession, unless unexpected crises occur. The IMF’s World Economic Outlook also provides global policymakers with added confidence in their efforts to control inflation without causing significant damage to the economy. However, despite these signs of optimism, global growth remains modest compared to historical standards, and there are still significant risks to be aware of.
The IMF has raised its forecast for global growth in 2023 to 3 percent, up from the previous projection of 2.8 percent in April. It also predicts a gradual easing of global inflation from 8.7 percent in 2022 to 6.8 percent this year and 5.2 percent in 2024, as the impact of higher interest rates spreads across the world.
Financial markets, which experienced turbulence due to the collapse of major banks in the United States and Europe, have largely stabilized, contributing to the improved outlook. Moreover, the risk of a US government default was averted in June when Congress acted to raise the borrowing cap, ensuring timely payment of bills for the world’s largest economy.
As the Federal Reserve is expected to raise interest rates this week, the IMF’s positive assessment aligns with the central banks’ efforts to contain inflation. The Fed has been gradually raising rates since March 2022, currently ranging from 5 percent to 5.25 percent. Policymakers aim to cool down the economy without causing significant harm, and they will assess the impact of previous rate hikes before deciding on further actions.
In light of the ongoing inflation challenges faced by countries like the United States, the IMF emphasizes the importance for central banks to prioritize price stability and strengthen financial supervision.
The IMF’s report also mentions that the United States is expected to experience a slowdown in economic growth, from 2.1 percent in 2022 to 1.8 percent in 2023 and 1 percent in 2024. Consumption, which has remained strong, is anticipated to decrease as Americans deplete their savings and interest rates continue to rise.
In the euro area, growth is projected to be only 0.9 percent this year, primarily due to Germany’s economic contraction, the largest economy in the region. However, growth is expected to pick up to 1.5 percent in 2024.
In Europe, policymakers are still grappling with inflation challenges. The European Central Bank is expected to raise interest rates for the 20 eurozone countries to the highest level since 2000. However, there is a shift in focus from the level of rates to their duration, as policymakers aim to restrain the economy and address domestic inflationary pressures generated by rising wages or corporate profits.
Although the economy has shown more resilience than expected this year, the outlook remains relatively weak. Some analysts suggest that the European Central Bank may halt interest rate increases amid signs of economic growth slowdown. Recent economic indicators in the eurozone, such as the manufacturing industry contraction and slowed services sector growth, support this assessment.
Next week, the Bank of England is expected to raise interest rates for the 14th consecutive time in an attempt to combat inflation. In June, inflation in Britain rose by 7.9 percent compared to the previous year. Despite avoiding a recession so far, Britain still faces economic challenges, including persistent inflation, tightening labor market pushing up wages, and concerns about high mortgage rates.
The sluggish recovery in China, the second-largest economy globally, is also impacting global output. The IMF points out a contraction in the Chinese real estate sector, weak consumption, and tepid consumer confidence as factors of concern for China’s economic outlook.
Recent official figures reveal a notable slowdown in China’s economy in the spring, attributed to declining exports, a deepening real estate slump, and local governments facing budget constraints resulting in spending cuts.
While there are reasons for optimism, the IMF report cautions that the world economy is not yet out of the woods. Geopolitical tensions, such as the war in Ukraine, pose a risk that could impact food and energy prices globally. The IMF also highlights the concern over the suspension of the Black Sea Grain Initiative and emphasizes the importance of avoiding further divisions in the global economy caused by geopolitical conflicts.
According to the IMF, additional volatility in commodity prices and hampered multilateral cooperation could result from such conflicts.
