In this April 7, 2021 photo, the seal of the International Monetary Fund (IMF) is seen outside of a headquarters building in Washington, DC. (PHOTO / AFP)
WASHINGTON - The International Monetary Fund on Tuesday raised its 2023 global growth estimates slightly given resilient economic activity in the first quarter, but warned that persistent challenges were dampening the medium-term outlook.
The IMF in its latest World Economic Outlook said inflation was coming down and acute stress in the banking sector had receded, but the balance of risks facing the global economy remained tilted to the downside and credit was tight.
The global lender said it now projected global real GDP growth of 3.0 percent in 2023, up 0.2 percentage point from its April forecast, but left its outlook for 2024 unchanged, also at 3.0 percent.
The 2023-2024 growth forecast remains weak by historical standards, well below the annual average of 3.8 percent seen in 2000-2019, largely due to weaker manufacturing in advanced economies, and it could stay at that level for years
The 2023-2024 growth forecast remains weak by historical standards, well below the annual average of 3.8 percent seen in 2000-2019, largely due to weaker manufacturing in advanced economies, and it could stay at that level for years.
"We're on track, but we're not out of the woods," IMF chief economist Pierre-Olivier Gourinchas told Reuters in an interview, noting that the upgrade was driven largely by first-quarter results. "What we are seeing when we look five years out is actually close to 3.0 percent, maybe a little bit above 3.0 percent. This is a significant slowdown compared to what we had pre-COVID."
This was also related to the aging of the global population, especially in countries like Germany and Japan, he said. New technologies could boost productivity in coming years, but that in turn could be disruptive to labor markets.
The outlook is "broadly stable" in emerging market and developing economies for 2023-2024, with growth of 4.0 percent expected in 2023 and 4.1 percent in 2024, the IMF said. But it noted that credit availability is tight and there was a risk that debt distress could spread to a wider group of economies.
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The world is in a better place now, the IMF said, noting the World Health Organization's decision to end the global health emergency surrounding COVID-19, and with shipping costs and delivery times now back to pre-pandemic levels.
"But forces that hindered growth in 2022 persist," the IMF said, citing still-high inflation that was eroding household buying power, higher interest rates that have raised the cost of borrowing and tighter access to credit as a result of the banking strains that emerged in March.
"International trade and indicators of demand and production in manufacturing all point to further weakness," the IMF said, noting that excess savings built up during the pandemic are declining in advanced economies, especially in the United States, implying "a slimmer buffer to protect against shocks."
While immediate concerns about the health of the banking sector - which were more acute in April - had subsided, financial sector turbulence could resume as markets adjust to further tightening by central banks, it said.
The impact of higher interest rates was especially evident in poorer countries, driving debt costs higher and limiting room for priority investments. As a result, output losses compared with pre-pandemic forecasts remain large, especially for the world’s poorest nations, the IMF said.
Lower inflation
The IMF forecast that global headline inflation would fall to 6.8 percent in 2023 from 8.7 percent in 2022, dropping to 5.2 percent in 2024, but core inflation would decline more gradually, reaching 6.0 percent in 2023 from 6.5 percent in 2022 and easing to 4.7 percent in 2024.
Gourinchas told Reuters it could take until the end of 2024 or early 2025 until inflation came down to central bankers' targets and the current cycle of monetary tightening would end.
The IMF warned that inflation could rise if the conflict in Ukraine intensified, citing concern about Russia's withdrawal from the Black Sea grain initiative, or if more extreme temperature increases caused by the El Nino weather pattern pushed up commodity prices. That in turn could trigger further rate hikes.
The IMF said world trade growth is declining and will reach just 2.0 percent in 2023 before rising to 3.7 percent in 2024, but both growth rates are well below the 5.2 percent clocked in 2022
The IMF said world trade growth is declining and will reach just 2.0 percent in 2023 before rising to 3.7 percent in 2024, but both growth rates are well below the 5.2 percent clocked in 2022.
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The IMF raised its outlook for the United States, the world's largest economy, forecasting growth of 1.8 percent in 2023 versus 1.6 percent in April as labor markets remained strong.
The fund cut its outlook for Germany, now forecast to contract 0.3 percent in 2023 versus a 0.1 percent contraction in April, but sharply upgraded its forecast for the UK, now expected to grow 0.4 percent versus a 0.3 percent contraction forecast in April.
Eurozone countries are expected to grow 0.9 percent in 2023 and 1.5 percent in 2024, both up 0.1 percentage point from April.
Japan's growth was also revised upward by 0.1 percentage point to 1.4 percent in 2023, but the IMF left its outlook for 2024 unchanged at 1.0 percent.
Interest rates still rising
The rise in central bank policy rates to fight inflation continues to weigh on economic activity, the IMF said, adding that the US Federal Reserve and the Bank of England were expected to raise rates by more than assumed in April, before cutting rates next year.
READ MORE: IMF: Investors overly optimistic on cost of taming inflation
It said central banks should remain focused on fighting inflation, strengthening financial supervision and risk monitoring. If further strains appeared, countries should provide liquidity quickly, it said.
