The IMF expects global economic growth to decline by 0.1 than previously anticipated generating 2.8% before rising to 3% in 2024. In 2022, economic growth stood at 3.4% and thus reflects the declining global economy.
The expectations were shared as part of the IMF’s World Economic Outlook’s press briefing.
Pierre-Olivier Gourinchas, the IMF’s Chief Economist, said the economy is still recovering from the “unprecedented upheavals” from the last three years – exacerbated by the banking issues.
“Advanced economies are expected to see an especially pronounced growth slowdown from 2.7% in 2022 to 1.3% in 2023. Global headline inflation is set to fall from 8.7% in 2022 to 7% in 2023 on the back of lower commodity prices, but underlying core inflation is proving to be stickier. Importantly, this outlook assumes that recent financial stresses remain contained.”
Gourinchas added that uncertainty clouds the short and medium-term outlooks with risks heavily tilted to the downside,
“Most prominently, recent banking system turbulence could result in a sharper and more persistent tightening of global financial conditions,” said Gourinchas. “The simultaneous rate hikes across countries could have more contractionary effects than expected, especially as debt levels are at historical highs. There might be a need for more monetary tightening if inflation remains stickier than expected. These risks and more could all materialize at a time when policymakers face much more limited policy space to offset negative shocks, especially in low-income countries.”
While policymakers attempt to thread the needle between recession and growth, events have made the job more difficult.
As the financial stress exemplified by the bank crisis is not deemed to be systemic, battling inflation remains the top concern. Gourinchas said that central banks should use their tools, but communicate objectives clearly, to avoid volatility.
“Financial policies should remain laser focused on preserving financial stability and watch for any buildup of risks in banks, non-banks, and the real estate sectors. Third, in many countries fiscal policy should tighten to ease inflation pressures, restore debt sustainability, and rebuild fiscal buffers. Finally, in the event of capital outflows that raise financial stability risks, emerging market and developing economies should use the integrated Policy framework, combining temporary targeted foreign exchange interventions and capital flow measures where appropriate.”
Part of the challenge in the US is that fiscal policy has been fighting the Fed. Last year’s Inflation Reduction Act was, in fact, inflationary as more stimulus is being pumped into the US economy.