- International Monetary Fund forecasts global growth bottoming out at 2.8% this year and rise modestly to 3% next year
- IMF chief economist Pierre-Olivier Gourinchas forecasts inflation will decline from 8.7% last year to 7% this year and 4.9% in 2024.
Gradual economic recovery from the pandemic and Russia’s invasion of Ukraine remains on track while China’s reopened economy is rebounding strongly and supply chain disruptions are unwinding, prompting the International Monetary Fund to forecast real GDP growth will bottom out at 2.8% this year and rise modestly to 3% next year, down from 3.4% in 2022.
In its latest World Economic Outlook, IMF said while the war’s dislocations to energy and food markets are receding, the massive and synchronized monetary policy tightening by most central banks should start bearing fruit, with inflation moving back towards targets.
“Global inflation will fall, though more slowly than initially anticipated,” said IMF chief economist Pierre-Olivier Gourinchas in a blog based on Chapter 1 of IMF’s April 2023 World Economic Outlook: “A Rocky Recovery.”
Gourinchas said inflation will decline from 8.7% last year to 7% this year and 4.9% in 2024. He said economic slowdown is concentrated in advanced economies, especially the euro area and the UK, where growth should fall to 0.8% and -0.3% this year before rebounding to 1.4 and 1%.
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% in 2023 from 2.8% in 2022, the economist said.
Gourinchas, alluding to the Silicon Valley Bank collapse that pulled down investment banking giant Credit Suisse another regional bank, said banking instability reminds everyone that the situation remains fragile and downside risks dominate again, blurring the economic outlook.
“First, 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, which excludes energy and food, has not yet peaked in many countries,” he said.
He forecast that “year-end to year-end” core inflation will slow to 5.1% in 2023, a 0.6 percentage point upward revision from his January update, “and well above target.”
Gourinchas ignored the risk of an uncontrolled wage-price spiral, saying nominal wage gains still lag price increases, implying real wage decline. He said strong corporate margins in recent years should absorb much of the rising labor costs provided inflation expectations stay well-anchored.
“The stability of any financial system hinges on its ability to absorb losses without recourse to taxpayers’ money,” he said, recalling the brief instability in the UK’s gilt market last fall and the recent US banking turbulence underscore that significant vulnerabilities exist both among banks and nonbank financial intermediaries. He said “quick and strong action” by financial and monetary authorities halted further instability.
Gourinchas said IMF’s World Economic Outlook explores a scenario where banks, faced with rising funding costs and the need to act more prudently, cut lending further, leading to an additional 0.3% reduction in output in 2023.
He warned the financial system may well be tested even more by nervous investors who often look for the next weakest link, as they did with Crédit Suisse. Financial houses with excess debt, credit risk or interest rate exposure, overreliance on short-term funding, or in jurisdictions with limited fiscal space, could be the next target. So could countries with weaker perceived
In such a severe downside scenario, global growth could slow to 1% this year, implying near stagnant income per capita, Gourinchas said, estimating probability of such an outcome at 15%.
With financial instability contained, monetary policy should remain focused on bringing inflation down, but be quick to adjust to financial developments, he said. By cooling off economic activity, tighter fiscal policy would support monetary policy, allowing real interest rates to return faster to a low natural level.
He urged regulators and supervisors to act now to ensure remaining financial fragilities don’t morph into a full-blown crisis by strengthening oversight and actively managing market strains.
IMF forecasts an overall slowdown in medium-term growth forecasts with five-year-ahead growth projections declining steadily from 4.6% in 2011 to 3% in 2023, partly reflecting the growth slowdown of previously rapidly growing economies such as China or Korea.
Some 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 geo-economic fragmentation leading to more trade tensions, less direct investment and a slower pace of innovation and technology adoption across fragmented “blocks.”