Global economy proving ‘remarkably resilient’ to recent shocks, says IMF
Fears of a worldwide recession triggered by the war in Ukraine and a cost of living crisis will prove unfounded, according to a health check from the International Monetary Fund.
In its half-yearly world economic outlook, which was produced before the surprise attack on Israel by Hamas, the IMF said growth had shown “remarkable resilience” in the face of a series of adverse shocks in recent years with activity slowing but not stalling.
Releasing its update at its annual meeting in Marrakech, the IMF said it detected little evidence of a wage-price spiral but warned central banks against cutting interest rates too quickly.
It said several headwinds to growth had subsided since its spring meeting in Washington in April. The World Health Organization no longer considered Covid-19 a global health emergency, supply chains had largely returned to normal, and financial conditions had eased after the US and Swiss authorities acted to contain turbulence in their banking sectors.
The World Economic Outlook (WEO) report said global growth was expected to fall from 3.5% in 2022 to 3% this year and 2.9% in 2024. The 2023 forecast was unchanged from the IMF’s last set of predictions in July, with the 2024 estimate revised down by 0.1 percentage points.
The US is expected to grow by 2.1% in 2023 and 1.5% in 2024, up 0.3 and 0.5 percentage points respectively since July, while the eurozone is forecast to grow by 0.7% this year and 1.2% in 2024, down 0.2 and 0.3 points respectively.
The UK, despite having its growth forecast revised up by 0.1 points to 0.5% this year, is expected to be the second weakest economy in the G7 group of major industrial nations after Germany, and to fall to the bottom of the league table in 2024 with growth of 0.6%, down 0.4 points on July.
However, the 2024 forecast is based on an interest rate forecast that the IMF says is out of date. When the WEO was being prepared last month, the IMF’s assumption was that the Bank of England’s ceiling for borrowing costs would be 6%. After Threadneedle Street’s decision to pause raising rates at the September meeting of its monetary policy committee, the IMF now believes the peak will be 5.25% or 5.5%.
The decline in UK growth reflected “tighter monetary policies to curb still high inflation and lingering impacts of the terms-of-trade shock from high energy prices”, the IMF said.
Pierre-Olivier Gourinchas, the IMF’s economic counsellor, said: “The global economy continues to recover slowly from the blows of the pandemic, Russia’s invasion of Ukraine, and the cost of living crisis. In retrospect, the resilience has been remarkable.
“As a result, projections are increasingly consistent with a ‘soft landing’ scenario, bringing inflation down without a major downturn in activity, especially in the US, where the forecast increase in unemployment is very modest, from 3.6 to 3.9% by 2025.”
Gourinchas said the slowdown was more pronounced in advanced economies compared with emerging markets, and that the US had “surprised on the upside, with resilient consumption” while the eurozone had been revised downward.
He said that even though recession would be averted, the global economy was limping along rather than sprinting.
He highlighted five key risks to the forecasts, namely a real estate crisis in China, a rise in commodity prices, inflation remaining stubbornly high, a crash in financial markets or high levels of borrowing preventing governments from easing policy in the face of fresh shocks.
Gourinchas said labour markets in developed economies remained buoyant, with historically low unemployment rates helping to support activity.
“So far, there is scant evidence of a ‘wage-price spiral’ and real wages remain below pre-pandemic levels,” he added.
The WEO said many countries were near the peak of their interest rate raising cycles and little further tightening of policy was warranted. “However, easing prematurely would squander the gains achieved in the past 18 months,” it said.