The world economy is showing signs of resilience this year despite lingering inflation and a slow recovery in China, the International Monetary Fund said on Tuesday, raising odds that a global recession can be avoided barring unexpected crises.
Optimistic signs in the IMF’s latest World Economic Outlook may give global policymakers additional confidence that their efforts to curb inflation without causing serious economic damage are working. However, global growth remains modest by historical standards and the fund’s economists warn that serious risks remain.
“The global economy is gradually recovering from the pandemic and Russia’s invasion of Ukraine, but it is not out of the woods yet,” IMF chief economist Pierre-Olivier Gaurinchas told a news conference on Tuesday.
The IMF raised its forecast for global growth to 3 percent this year from 2.8 percent in its April projection. Global inflation is predicted to ease from 8.7 percent in 2022 to 6.8 percent this year and 5.2 percent in 2024, as the effects of higher interest rates filter down around the world.
The outlook was largely rosier, as financial markets stabilized largely after being rattled by the collapse of several large banks in the United States and Europe. Another major financial risk was averted in June when Congress acted to lift the US government’s borrowing cap, ensuring the world’s largest economy pays its bills on time.
The Federal Reserve is expected to raise interest rates by a quarter point at its meeting this week as the Federal Reserve opens up its future options, according to new data from the IMF. The Fed has been aggressively raising rates to tame inflation, lifting rates from near zero today to 5.25 percent by March 2022. Policymakers are trying to cool the economy without crushing it and hold rates steady in June to gauge how the US economy is absorbing the higher borrowing costs already approved by the Fed.
As countries like the United States faced inflation, the IMF urged central banks to focus on restoring price stability and strengthening financial supervision.
“We have entered the final phase of the inflationary cycle that began in 2021, with hopes that inflation will begin to ease,” Mr Guarinchas said. “But a promise is not a policy and a touchdown may prove quite difficult to implement.”
He said: “It is critical to avoid easing monetary policy until inflation shows clear signs of sustained cooling.”
Fed officials will release their July interest rate decision on Wednesday, after Fed President Jerome H. Powell holds a news conference with him. Policymakers had previously forecast that rates could be raised again in 2023, exceeding an expected move this week. While investors doubt they will eventually make that final rate move, officials want to see more evidence that inflation is falling and the economy is cooling before it does in either direction.
Growth in the United States will slow to 1.8 percent in 2023 and 1 percent in 2024, from 2.1 percent last year, the IMF said on Tuesday. Consumption, which remains strong as Americans save more and interest rates rise further, is expected to begin to decline in the coming months.
Growth in the euro area is estimated at just 0.9 percent this year, before rising to 1.5 percent in 2024, dragged down by contraction in Germany, the region’s largest economy.
European policymakers are still preoccupied with the struggle to slow inflation. On Thursday, the European Central Bank is expected to raise interest rates for the 20 countries that use the euro currency to the highest level since 2000. But a year after raising interest rates, the central bank’s policymakers are trying to shift the focus to how long higher rates will last.
Policymakers have raised rates as the economy has proven somewhat more resilient than expected this year, supported by a strong labor market and low energy prices. But the economic outlook is still relatively weak, and some analysts expect the European Central Bank to be close to halting interest rate hikes amid signs its restrictive policy stance is weighing on economic growth. On Monday, an index of economic activity in the eurozone fell to its lowest level in eight months in July, as the manufacturing industry 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 Britain, where prices in June rose 7.9 percent from a year earlier.
Britain has defied some expectations, including economists at the IMF, by avoiding recession so far this year. But the country still faces a set of challenging economic factors: a tight labor market is proving stubbornly stable as wages rise, while households are increasingly concerned about the impact of higher interest rates on their mortgages as repayment rates reset every few years.
A weaker-than-expected recovery in China, the world’s second-largest economy, is weighing on global output. A sharp contraction in China’s real estate sector, weak consumption and lukewarm consumer confidence are reasons to worry about China’s outlook, the IMF pointed out.
Official data released this month showed China’s economy slowed significantly in the spring as exports fell, a real estate slump deepened and some debt-ridden local governments had to cut spending after running low on cash.
Mr Gaurinchas said China’s steps to restore confidence in the property sector were a positive step, and suggested that targeted support to households to boost confidence would strengthen consumption.
Despite the reasons for optimism, the IMF report makes it clear that the world economy is far from clear.
Russia’s war in Ukraine threatens to push up global food and energy prices, and the recently ended deal to allow Ukrainian grain exports suggests headwinds, the fund noted. The IMF predicts that the termination of the agreement could cause grain prices to rise by 15 percent.
“The war in Ukraine could intensify, pushing up food, fuel and fertilizer prices further,” the report said. “The recent suspension of the Black Sea Grain Initiative is worrisome in this regard.”
It reiterated its warning against allowing the war in Ukraine and other sources of geopolitical pressure to further fragment the world economy.
“Such developments could lead to additional volatility in commodity prices and disrupt multilateral cooperation in the provision of global public goods,” the IMF said.
