The International Monetary Fund said on Tuesday that the global economy is showing signs of resilience this year despite lingering inflation and a sluggish recovery in China, making it more likely that a global recession could be avoided in the absence of an unexpected crisis.
Optimistic signs in the IMF’s latest global economic outlook may also lend further confidence to global policymakers that efforts to curb inflation without causing serious economic damage are working. But global growth remains poor by historical standards, and the Fund’s economists warn that serious risks remain.
“The global economy continues to recover gradually from the pandemic and Russia’s invasion of Ukraine, but is not yet out of the crisis,” IMF chief economist Pierre-Olivier Grinchat said at a news conference on Tuesday.
The IMF has raised its global growth forecast for this year to 3% from 2.8% in April. The report forecast that global inflation will fall from 8.7% in 2022 to 6.8% this year and 5.2% in 2024, as the impact of higher interest rates will spread around the world.
The eased outlook is largely due to a near stabilization in financial markets, which had been in turmoil after the failures of several large U.S. and European banks. Another major financial risk was averted in June when Congress removed the U.S. government’s borrowing cap, ensuring the world’s largest economy will continue to pay its bills on time.
The IMF’s new figures come amid widespread expectations that the Fed will raise rates by a quarter of a percentage point at its meeting this week, leaving future options open. The Fed has been aggressively raising interest rates to try to keep inflation under control, from near zero in March 2022 to now in the 5% to 5.25% range. Policymakers are trying to cool the economy rather than crush it, leaving rates unchanged in June to assess how the U.S. economy is absorbing higher borrowing costs already approved by the Fed.
As countries such as the United States continue to fight inflation, the IMF called on central banks to remain focused on restoring price stability and strengthening financial supervision.
“We hope inflation is starting to recede, and we have entered the final phase of the inflation cycle that began in 2021,” Grinthaus said. “But hope is not policy, so a touchdown may prove to be much more difficult to implement.”
“It remains important to avoid monetary easing until underlying inflation shows clear signs of a sustained cooling,” he added.
Fed officials will announce the July interest rate decision on Wednesday, followed by a press conference with Fed Chairman Jerome H. Powell. Policymakers had previously expected one more rate hike in 2023, exceeding expectations this week. Investors question whether they will eventually finalize interest rates, but officials are likely to want to see more evidence that inflation is falling and the economy is cooling before deciding in any direction.
The IMF said Tuesday it expects US growth to slow to 1.8% in 2023 and 1% in 2024 from 2.1% last year. He expects sustained strong spending to begin to wane in the coming months as Americans tap into their savings and interest rates rise further.
The eurozone’s growth is expected to pick up to 1.5% in 2024 after just 0.9% this year due to the contraction of Germany, the region’s largest economy.
European policymakers remain preoccupied with efforts to keep inflation under control. On Thursday, the European Central Bank will raise interest rates in 20 countries using the euro currency to their highest level since 2000. But after a year of rate hikes, central bank policymakers are shifting the focus from the question of how high interest rates will go to how long they will remain at levels intended to contain the economy and eradicate the domestic inflationary pressures created by rising wages and corporate profits.
Policy makers have hiked rates after the economy turned out to be slightly stronger than expected this year, supported by a strong labor market and lower energy prices. But the economic outlook remains relatively weak, and some analysts expect a halt to rate hikes amid signs that the European Central Bank’s restrictive policy stance is weighing on economic growth. on monday, indicators of economic activity In the euro area, production fell to an eight-month low in July as manufacturing contracted further and the services sector slowed.
Next week, the Bank of England is expected to raise interest rates for the 14th consecutive time in a bid to curb inflation in the UK, where June prices rose 7.9% year-on-year.
Britain has disappointed some expectations. Opinions of IMF economists, by avoiding a recession so far this year. However, the country still faces a series of difficult economic factors. Inflation remains persistent, partly because a tight labor market is pushing up wages, while interest rates tend to reset every few years, making households increasingly concerned about the impact of high interest rates on their mortgages.
A weaker-than-expected recovery in China, the world’s second-largest economy, is also weighing on global production. The IMF cited a sharp contraction in China’s property sector, sluggish consumption and low consumer confidence as reasons for concern about China’s prospects.
Official data released this month showed China’s economy slowed markedly in the spring compared to the beginning of the year as exports fell, a property slump deepened and some indebted local governments were forced to cut spending due to lack of funds.
Grinchas said the steps China has taken to restore confidence in the property sector are a positive step, suggesting that targeted support for families to boost confidence could boost spending.
Despite the reasons for optimism, the IMF report reveals uncertainties in the global economy.
Russia’s war in Ukraine continues to pose a threat that could push global food and energy prices higher, and the fund said the recently terminated agreement to allow Ukrainian grain exports could portend headwinds. The IMF estimates that ending the deal could boost grain prices by up to 15%.
“War in Ukraine could escalate, further increasing food, fuel and fertilizer prices,” the report said. “The recent suspension of the Black Sea Grains Initiative is concerning in this respect.”
He also reiterated his warning that the war in Ukraine and other sources of geopolitical tensions would further divide the global economy.
“These developments could contribute to further volatility in commodity prices and hamper multilateral cooperation in the provision of global public goods,” the IMF said.
