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IMF raises 2023 growth forecast slightly; warns battle against inflation 'far from won'

Bryan Wu
Bryan Wu • 9 min read
IMF raises 2023 growth forecast slightly; warns battle against inflation 'far from won'
2023 could be a turning point, with growth bottoming out and inflation declining, says IMF chief economist Pierre-Olivier Gourinchas. Photo: Bloomberg
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The global economy is poised to slow in 2023 before rebounding next year, as growth remains weak by historical standards, with the fight against inflation and Russia’s war in Ukraine continuing to weigh on activity.

Despite these headwinds, the outlook for the year ahead is less gloomy than what the International Monetary Fund (IMF) initially forecasted in October 2022. This year could represent a “turning point”, with growth bottoming out and inflation declining, says IMF economic counsellor and director of research Pierre-Olivier Gourinchas during a press briefing in Singapore.

On Jan 31, the IMF updated its World Economic Outlook (WEO) forecast for global growth to 2.9% in 2023. This is still a decline from the 3.4% growth in 2022, but marks an improvement over its initial prediction of 2.7% growth this year, with warnings that the world could easily tip into recession.

Looking ahead, the IMF expects global growth to bounce back to 3.1% in 2024 off the back of China’s sooner-than-anticipated reopening, which is paving the way for a “rapid rebound” in activity. The Fund’s projections for 2023 and 2024 are still below the historical 2000–2019 average of 3.8% growth.

While the balance of risks remains tilted to the downside, Gourinchas says adverse risks have moderated since the WEO was published in October last year and some positive factors have “gained in relevance”.

On the upside, strong household balance sheets, together with tight labour markets and solid wage growth, could help sustain private demand in numerous economies, although potentially complicating the fight against inflation. Should supply-chain bottlenecks ease and labour markets cool off due to falling vacancies, this could also allow for a softer landing and require less monetary tightening from central banks.

See also: A new trade war offers no easy way back for old global order

However, severe health outcomes or a sharper-than-expected slowdown in the property sector in China could stall its economic recovery. An escalation of the Russia-Ukraine war continues to remain a major threat to global stability that could destabilise energy or food markets and further fragment the global economy. Financial markets could also suddenly reprice in response to adverse inflation news, while further geopolitical fragmentation could hamper economic progress, especially in emerging markets and developing economies, says Gourinchas.

Meanwhile, inflation could remain stubbornly high amid continued labour market tightness and growing wage pressures, requiring tighter monetary policies and a resulting sharper slowdown in activity.

Inflation battle far from over

See also: Should we fear a trade war?

Although overall global financial conditions have improved, with the encouraging news of inflation pressures beginning to abate with overall measures now decreasing in most countries, Gourinchas emphasises that “the battle is far from won”. Core inflation, which excludes more volatile energy and food prices, has yet to peak in many countries, he notes.

“Monetary policy has started to bite, with a slowdown in new home construction in many countries. Yet, inflation-adjusted interest rates remain low or even negative in the Euro area and other economies, and there is significant uncertainty about both the speed and effectiveness of monetary tightening in many countries,” he reasons.

“Global inflation is expected to decline this year, but even by 2024, projected average annual headline and core inflation will still be above pre-pandemic levels in more than 80% of countries,” adds Gourinchas.

In regions where inflation pressures remain too elevated, the IMF economist believes central banks need to raise real policy rates above the neutral rate and keep them there until underlying inflation is on a decisive declining path. “Easing too early risks undoing all the gains achieved so far,” Gourinchas warns.

“The financial environment remains fragile, especially as central banks embark on an uncharted path toward shrinking their balance sheets. It will be important to monitor the build-up of risks and address vulnerabilities, especially in the housing sector or in the less-regulated non-bank financial sector.

“Emerging market economies should let their currencies adjust as much as possible in response to the tighter global monetary conditions. Where appropriate, foreign exchange interventions or capital flow measures can help smooth volatility that’s excessive or not related to economic fundamentals,” he adds.

While governments have responded to the cost-of-living crisis by supporting people and businesses with broad and untargeted policies to cushion the shock, Gourinchas believes many of these measures have proved costly and increasingly unsustainable.

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“Countries should instead adopt targeted measures that conserve fiscal space, allow high energy prices to reduce demand for energy, and avoid overly stimulating the economy,” he says.

According to him, apart from the economic stimulus many governments have employed, supply-side policies should also have a role to play, and can help remove key growth constraints, improve resilience, ease price pressures and foster the green transition. “These would help alleviate the accumulated output losses since the beginning of the pandemic, especially in emerging and low-income economies.”

Varied global performances

Economic growth proved “surprisingly resilient” in the third quarter of 2022, says Gourinchas, with strong labour markets, robust household
consumption and business investment, and better-than-expected adaptation to the energy crisis in Europe. A weakening of the US dollar from its high in November 2022 has also provided “modest relief” to emerging and developing countries, he adds.

For advanced economies, he says the slowdown will be more pronounced, with a decline from 2.7% last year to 1.2% and 1.4% in 2023 and 2024 respectively. Gourinchas expects nine out of 10 advanced economies to see a deceleration in growth this year.

In the US, the IMF is forecasting growth to slow to 1.4% in 2023 as Federal Reserve interest-rate hikes work their way through the economy, while Euro area conditions are “more challenging” despite signs of resilience to the energy crisis, a mild winter, and generous fiscal support, he says.

“With the European Central Bank tightening monetary policy, and a negative terms-of-trade shock — due to the increase in the price of its imported energy — we expect growth to bottom out at 0.7% this year,” explains Gourinchas.

In China, with “all indications” pointing towards a rapid reopening of its economy, he sees growth rebounding to 5.2% in 2023 as activity and mobility recover after the extended restrictions and Covid-19 outbreaks that dampened activity last year. “When we think about the reopening of the Chinese economy, it’s going to have an impact on the supply side. We can anticipate that once the [Chinese] economy fully reopens, we will have fewer supply chain disruptions than we witnessed in 2022,” he says.

There will also be an increase in domestic demand as Chinese households resume participation in various sectors, including tourism — which will benefit external markets as well. Gourinchas notes that some estimates suggest that every percentage point of higher growth in China equates to a spillover effect to the rest of the world that is about 0.3 percentage points, a “significant” figure.

He adds that India remains a “bright spot” in the global economy. “Together with China, [India] will account for half of global growth this year, versus just a tenth for the US and Euro area combined,” he says.

Meanwhile, the IMF says that emerging markets and developing economies have already bottomed out, with growth expected to rise modestly to 4% and 4.2% this year and next.

China reopening outweighed in Asean

However, for trade-dependent Asian economies, Gourinchas says slower global growth will trump China’s reopening, leading to a downward revision in economic activity.

The IMF’s 2023 forecast for Asean-5 — that comprises Singapore, Malaysia, Vietnam, Indonesia and the Philippines — was cut to 4.3% in its update from 4.5% in the October forecast. The Fund’s 2024 forecast was also cut by 0.2 percentage points to 4.7%.

For Singapore, the IMF reduced its GDP growth outlook for 2023 to 1.5% from the 2.3% forecast it issued last October. Gourinchas notes that the IMF is now projecting a growth of 3.7% for Singapore last year, a “sharp upward revision” compared to its October forecast of 3.0%.

“What is important for Singapore — and is also true for many other Asian economies — is openness to trade. This is an economy that’s going to be very influenced by what’s happening in terms of global activities,” he explains.

Although China’s reopening is a favourable factor that will spur global economic activity, the global context of a slowing economy will be what “dominates” for countries that are open to global trade, adds Gourinchas.

And while the IMF has emphasised that the global economy will indeed slow down this year, experts like Oxford Economics director of global macro research Ben May believe the IMF’s outlook could still be too rosy. He says the IMF’s upward revision is “nothing to get worked up about” and fits with the more positive narrative developing for the global economy.

According to May, the IMF’s upward revision to global growth in 2023 to slow only marginally from last year amounts to an assessment that the global economy will enjoy a soft landing. Although he says that tail risks have lessened recently, he believes the Fund’s latest forecasts are “too sanguine”.

“Not only does the IMF expect China’s GDP growth to exceed the widely touted 5% growth target for this year, its forecasts for both the US and eurozone are at the top end of consensus expectations,” he says. “Given data indicators point to a broad-based weakening around the turn of the year, we think our slightly below-consensus view is more defensible and that it’s far too soon to substantially upgrade our baseline economic forecasts for 2023, particularly as some of the 4Q2022 GDP data aren’t as strong as they might initially seem.”

On a purchasing power parity (PPP) weighted basis, May expects global GDP growth in 2023 to slow to 2.0% from 3.2% last year. “While we expect calendar-year growth to be markedly weaker than any year since the global financial crisis (2020 excluded), the IMF anticipates growth this year to be similar to 2019 — the worst year in the 2010s. The IMF baseline view is for a relatively soft landing for the global economy,” he says.

May adds that the IMF’s more upbeat global assessment reflects greater optimism about economic growth in both the advanced economies and emerging markets. For both groups, Oxford Economics’ GDP growth forecasts for 2023 are about 1 percentage point lower than the Fund’s.

The IMF’s latest outlook may be slightly more optimistic than some of its contemporaries’, but Gourinchas’ message is that the global economic outlook has merely “not worsened” — good news, but “not enough”. “The road back to a full recovery, with sustainable growth, stable prices, and progress for all, is only starting,” he says.

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