Global economy shows signs of resilience despite lingering threats: IMF

NEW YORK – The world economy is showing signs of resilience in 2023 despite lingering inflation and a sluggish recovery in China, the International Monetary Fund (IMF) said on Tuesday, raising the odds that a global recession could be avoided barring unexpected crises.

The signs of optimism in the IMF’s latest World Economic Outlook may also give global policymakers additional confidence that their efforts to contain inflation without causing serious economic damage are working.

Global growth, however, remains meagre by historical standards, and the fund’s economists warned that serious risks remained.

The IMF raised its forecast for global growth in 2023 to 3 per cent, from 2.8 per cent in its April projection. It predicted that global inflation would ease from 8.7 per cent in 2022 to 6.8 per cent in 2023 and 5.2 per cent in 2024, as the effects of higher interest rates filter throughout the world.

The outlook was rosier in large part because financial markets – which had been roiled by the collapse of several large banks in the United States and Europe – have largely stabilised.

Another big financial risk was averted in June when the US Congress acted to lift the US government’s borrowing cap, ensuring that the world’s largest economy would continue to pay its bills on time.

The new figures from the IMF come as the Federal Reserve is widely expected to raise interest rates by a quarter point at its meeting this week, while keeping its future options open.

Policymakers have been trying to cool the US economy without crushing it and held rates steady in June to assess how the US economy was absorbing the higher borrowing costs that the Fed had already approved.

As countries like the US continue to grapple with inflation, the IMF urged central banks to remain focused on restoring price stability and strengthening financial supervision.

The IMF said on Tuesday it expected growth in the US to slow from 2.1 per cent in 2022 to 1.8 per cent in 2023 and 1 per cent in 2024. It expects consumption, which has remained strong, to begin to wane in the coming months as Americans draw down their savings and interest rates increase further.

Europe, Britain and China

Growth in the euro area is projected to be just 0.9 per cent in 2023, dragged down by a contraction in Germany, the region’s largest economy, before picking up to 1.5 per cent in 2024.

Britain has defied some expectations, including those of economists at the IMF, by avoiding a recession in 2023. But the country still faces a challenging set of economic factors: Inflation is proving stubbornly persistent in part because a tight labour market is pushing up wages, while households are growing increasingly concerned about the impact of high interest rates on their mortgages because the repayment rates tend to be reset every few years.

A weaker-than-expected recovery in China, the world’s second-largest economy, is also weighing on global output.

The IMF pointed to a sharp contraction in the Chinese real estate sector, weak consumption and tepid consumer confidence as reasons to worry about China’s outlook.

Official figures released in July showed that China’s economy slowed markedly in the spring from earlier in 2023, as exports tumbled, a real estate slump deepened and some debt-ridden local governments had to cut spending after running low on money.

War in Ukraine still a threat

Despite reasons for optimism, the IMF report makes plain that the world economy is not in the clear.

Russia’s war in Ukraine continues to pose a threat that could send global food and energy prices higher, and the fund noted that the recently terminated agreement that allowed Ukrainian grain to be exported could portend headwinds.

“The war in Ukraine could intensify, further raising food, fuel and fertiliser prices,” the report said. “The recent suspension of the Black Sea Grain Initiative is a concern in this regard.”

It also reiterated its warning against allowing the war in Ukraine and other sources of geopolitical tension to further splinter the world economy.

“Such developments could contribute to additional volatility in commodity prices and hamper multilateral cooperation on providing global public goods,” the IMF said. NYTIMES