The International Monetary Fund has released new economic forecasts and warns that it will be hard for policymakers to bring down inflation while keeping a growth momentum.
Ishara S. Kodikara | Afp | Getty Images
The International Monetary Fund on Tuesday released its weakest global growth expectations for the medium term in more than 30 years.
The D.C.-based institution said that five years from now, global growth is expected to be around 3% — the lowest medium-term forecast in an IMF World Economic Outlook since 1990.
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“The world economy is not currently expected to return over the medium term to the rates of growth that prevailed before the pandemic,” the Fund said in its latest World Economic Outlook.
The weaker growth prospects stem from the progress economies like China and South Korea have made in increasing their living standards, the IMF said, as well as slower global labor force growth and geopolitical fragmentation, such as Brexit and Russia’s invasion of Ukraine.
These forces are now overlaid by and interacting with new financial stability concerns.
In the short term, however, the IMF expects global growth of 2.8% this year and 3% in 2024, slightly below the fund’s estimates published in January. The new estimates are a cut of 0.1 percentage points for both this year and next.
“The anemic outlook reflects the tight policy stances needed to bring down inflation, the fallout from the recent deterioration in financial conditions, the ongoing war in Ukraine, and growing geoeconomic fragmentation,” the IMF said in the same report.
Looking at some of the regional breakdowns, the IMF sees the United States economy expanding by 1.6% this year and the euro zone growing by 0.8%. However, the United Kingdom is seen contracting by 0.3%.
China’s GDP is expected to increase by 5.2% in 2023, according to the IMF, and India’s by 5.9%. The Russian economy — which contracted by more than 2% in 2022 — is seen growing by 0.7% this year.
“The major forces that affected the world in 2022 — central banks’ tight monetary stances to allay inflation, limited fiscal buffers to absorb shocks amid historically high debt levels, commodity price spikes and geoeconomic fragmentation with Russia’s war in Ukraine, and China’s economic reopening—seem likely to continue into 2023. But these forces are now overlaid by and interacting with new financial stability concerns,” the IMF warned.
Banking turmoil
The IMF said that its baseline forecast “assumes that the recent financial sector stresses are contained.” It comes after a number of banks failed in March, causing volatility across global markets.
The pressures in the banking sector have dissipated in recent weeks, but they have made the overall economic picture worse in the eyes of the IMF.
“Financial sector stress could amplify and contagion could take hold, weakening the real economy through a sharp deterioration in financing conditions and compelling central banks to reconsider their policy paths,” the fund said.
The bank failures shed light on the potential consequences of hawkish monetary policy across many major economies. Higher interest rates, raised by central banks battling to bring down stubbornly high inflation, are hurting companies and national governments with high levels of debt.
“A hard landing — particularly for advanced economies — has become a much larger risk. Policymakers may face difficult trade-offs to bring sticky inflation down and maintain growth while also preserving financial stability,” the IMF said.
The institution expects global headline inflation to drop from 8.7% in 2022 to 7% this year, as energy prices come down. However core inflation, which excludes volatile food and energy costs, is expected to take longer to fall.
In most cases, the IMF does not expect headline inflation to return to its target levels before 2025.