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The IMF expects the world economy to grow less this year

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The International Monetary Fund predicted on Monday that growth in the world economy will be weak this year and warned that although the fight against inflation is starting to bear fruit globally, central banks should continue their efforts to lower it because risks persist.

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In an update to its Global Outlook Report (WEO), the agency adjusted its forecast for this year and warned of the most important challenges facing the world economy.

Pierre-Olivier Gourinchas, director of research of the organization, presented from Singapore the report entitled “Inflation has reached its maximum in a context of decline”.

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The Fund expects global growth to decline from 3.4% in 2022 to 2.9% this year. The forecast for 2023 is 0.2 percentage points higher than expected in October 2022, but below the historical average (2000-19) by 3.8%.

In 2024, growth will rise to 3.1%.

In Latin America and the Caribbean, growth is expected to slow from 3.9% in 2022 to 1.8% in 2023.

The IMF data for this year are more optimistic than those presented on January 7 by the World Bank, which forecast a sharp drop in growth to 1.7% by 2023, less than the 3% it forecast 6 months ago .

Fight against inflation

As for the fight against inflation, Gourinchas said it “is beginning to bear fruit, but central banks must continue their efforts.”

The Fund expects global inflation to fall from 8.8% in 2022 to 6.6% in 2023 and 4.3% in 2024, levels still higher than those observed before the pandemic (2017-19) by around 3.5%.

“Growth will remain weak by historical standards as the fight against inflation and Russia’s war in Ukraine weigh on activity,” Gourinchas said.

However, he added that “despite these headwinds, the outlook is less gloomy than our October forecast and could represent a turning point, with low growth and declining inflation”.

The Fund noted some improvements in the third quarter of last year, with “strong labor markets, strong household consumption and business investment, and better-than-expected adjustment to Europe’s energy crisis.”

They point out that inflation has also shown improvements globally and the general measures taken to curb it are now easing in most countries, although they point out that core inflation – which excludes more volatile energy and food prices – , it hasn’t peaked yet in many countries.

The reopening of China

They also point to the positive impact of China’s reopening, an improvement in global financial conditions and a weakening dollar as “modest relief” for emerging and developing countries.

However, the Fund warns that the slowdown will be more marked for advanced economies, with a drop from 2.7% last year to 1.2% this year. “Nine out of 10 advanced economies are likely to slow down,” they warn.

US growth to slow from 2% in 2022 to 1.4% this year and the interest rate policy followed by the Federal Reserve will be key in the coming years.

Conditions in the euro area are more difficult despite signs of resilience to the energy crisis, a mild winter and generous fiscal support. They expect just 0.7% this year.

Emerging markets

Emerging markets and developing economies have already bottomed out as a group, with growth expected to recover modestly to 4% and 4.2% this year and next.

As restrictions on the Covid outbreak are lifted, China will rebound to 5.2% this year.

The IMF, however, warns of several risks that could complicate global growth.

China’s recovery could stall between larger-than-expected economic disruptions due to current or future waves of Covid-19 infections or a sharper-than-expected slowdown in the housing sector.

-Inflation could remain high due to persistent labor market tensions and mounting pressures on wages, which would require tighter monetary policies and a sharper slowdown in activity.

An escalation of the war in Ukraine remains a major threat for global stability that could destabilize energy or food markets and further fragment the world economy.

– A sudden repricing in financial markets, for example in response to bad inflation news, could tighten financial conditions, especially in emerging markets and developing economies.

Gourinchas warns that “although “inflation news is encouraging, the battle is far from won.”

From the Fund they underline that “monetary policy has begun to have an impact, with a slowdown in the construction of new homes in many countries. However, inflation-adjusted interest rates remain low or even negative in the euro area and other economies, and in many countries there is considerable uncertainty about the speed and effectiveness of monetary tightening.

The challenge of raising rates to curb inflation without disproportionately impacting growth is always paramount. If monetary policy is “eased too soon, there is a risk of undoing all the gains made so far,” they say.

“The financial environment remains fragile,” the document said. “Countries should take specific measures that preserve fiscal space, allow high prices to reduce energy demand, and avoid overstimulating the economy,” he recommends.

“This time, the global economic outlook has not worsened. This is good news, but not enough. The road back to a full recovery, with sustainable growth, stable prices and progress for all, is only just beginning.”

Washington correspondent

B. C

Source: Clarin

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