The global economy will weaken this year as rising interest rates and Russia’s war in Ukraine continue to weigh on activity. But economists are more optimistic than they were a few months ago.
The International Monetary Fund said on Monday it now expects global growth to slow from 3.4% in 2022 to 2.9% in 2023. That’s up from a forecast of 2.7% in October.
The upward revision to the outlook reflects the “sudden reopening” of China, which the IMF said “paves the way for a rapid rebound in activity”. He also cited the unexpected resilience of many economies in the second half of 2022, as well as an improvement in global financial conditions as inflation begins to subside and the US dollar recovers from its highs.
Official data released on Tuesday showed that the European economy managed to maintain its growth in the fourth quarter of 2022. GDP growth in countries using the euro was 0.1% compared to the third quarter of the year , easing fears of a recession..
“The outlook is less gloomy than in our October forecast and could represent a turning point, with a dip in growth and a drop in inflation,” Pierre-Olivier Gourinchas, director of research at the IMF, wrote in an article. of blogging.
The IMF stressed that growth this year “will remain weak by historical standards.” (Between 2000 and 2019, the annual average was 3.8%.)
Central banks will have to continue their aggressive campaign to reduce inflation, which has been high for decades, which will lead to a slowdown in economic activity. He predicted that “nine out of ten advanced economies are likely to slow down.”
In the United States, growth is expected to slow from 2% in 2022 to 1.4% in 2023. Europe — whose economy has proven surprisingly robust despite the region’s energy crisis, partly due to a mild winter so far — is expected to see growth among the 20 countries that use the euro fall from 3.5% to 0.7%.
The UK is expected to experience a contraction of 0.6%. It is the only Group of Seven economy expected to contract this year. A closely watched survey of executives released last week showed the biggest drop in business activity since the nationwide Covid lockdown two years ago.
Rising interest rates and weak consumer confidence are weighing on activity in the dominant service sector, while the public sector has been hit by the worst wave of strikes in decades.
Yet the IMF sees some improvements in the prospects. A major reason is China.
Beijing ended its strict “zero Covid” policy late last year, reopening its borders and moving away from harsh quarantine and testing policies that had stunted the growth of the world’s second-largest economy. Its 3% expansion in 2022 was one of the country’s worst performances in decades.
The IMF now expects growth in China to rebound to 5.2% this year, significantly higher than its previous estimate.
Inflation trends are also promising. The IMF has noted that “global measures [are] currently declining in most countries,” although price increases for non-food and energy goods and services have not yet peaked in many cases. The annual title The US inflation reading peaked in June, while Europe’s inflation has fallen since October, when it hit a record high.
The IMF predicts that global inflation will drop from 8.8% in 2022 to 6.6% in 2023 and 4.3% in 2024. Before the pandemic, it was close to 3.5%.
Meanwhile, a decline in US dollar strength since November has been beneficial for emerging markets and developing economies. The sharp rise in the greenback has made it more expensive to import raw materials, including food and energy, and has increased the cost of paying interest on certain debts.
Risks to the outlook remain substantial, the IMF warned. China’s recovery could run out of steam if future waves of coronavirus keep people at home or if the vulnerable real estate sector slows sharply. Inflation could stay high for longer than central banks would like, imposing tighter monetary policy. The war in Ukraine remains a major source of uncertainty. An escalation could worsen disruptions in food and energy markets.
For now, however, things are going a bit better for the next 12 months – while emphasizing that they will not be easy.
“This time around, the global economic outlook has not deteriorated,” Gourinchas wrote. “It’s good news, but not enough. The road back to full recovery, with sustainable growth, stable prices and progress for all, has only just begun.