World Economy Shows Signs of Resilience Amidst Inflation and Slow Recovery in China, IMF Says
Despite concerns about inflation and a sluggish recovery in China, the world economy is displaying signs of resilience this year, according to the International Monetary Fund (IMF). The IMF’s latest World Economic Outlook report highlights increasing optimism and raises the possibility of avoiding a global recession, as efforts to contain inflation without causing severe economic damage appear to be effective. However, the IMF economists caution that significant risks continue to exist.
The IMF has revised its forecast for global growth this year to 3 percent, up from its previous projection of 2.8 percent in April. The report also predicts a decline in global inflation from 8.7 percent in 2022 to 6.8 percent this year and 5.2 percent in 2024, as the impact of higher interest rates permeates the global economy. These revised figures reflect the stabilization of financial markets, which were previously unsettled by the collapse of major banks in the United States and Europe. Moreover, the recent decision by the U.S. Congress to lift the government’s borrowing cap has alleviated another significant financial risk.
The positive outlook comes as the Federal Reserve prepares to raise interest rates by a quarter point at its upcoming meeting, while maintaining flexibility for future moves. The Fed’s aggressive rate hikes, started in March 2022 when rates were near zero, have aimed to curb inflation without jeopardizing economic growth. In June, the Fed decided to keep rates steady to assess the impact of the elevated borrowing costs. The IMF emphasizes the importance for central banks to continue focusing on price stability and strengthening financial supervision as countries, including the United States, grapple with inflation.
Moving forward, the IMF foresees a slowdown in the United States’ growth from 2.1 percent in 2022 to 1.8 percent in 2023 and 1 percent in 2024. The report suggests that consumption, which has remained robust, will gradually decrease as Americans dip into their savings and interest rates rise further. In the Eurozone, growth is projected to be modest at 0.9 percent this year, primarily due to a contraction in Germany, the region’s largest economy. However, growth is anticipated to improve to 1.5 percent in 2024.
While European policymakers wrestle with controlling inflation, the European Central Bank is expected to raise interest rates this week, marking the highest level since 2000. After a year of increasing rates, policymakers are now shifting focus to how long rates will remain at levels intended to curb the economy and eliminate domestic inflationary pressures resulting from wage and corporate profit increases. The IMF report highlights that the economic outlook in the Eurozone is still relatively weak. In July, an economic activity index dropped to its lowest level in eight months, signaling contracting manufacturing and a slowdown in the services sector.
Next week, the Bank of England is expected to raise interest rates for the 14th consecutive time in an effort to contain inflation in Britain, where prices rose by 7.9 percent in June compared to the previous year. Although Britain has defied some expectations by avoiding a recession so far, it faces challenges such as persistent inflation due to rising wages in a tight labor market, and concerns about the impact of high interest rates on mortgages.
The IMF’s report also highlights China’s weaker-than-expected recovery, which continues to weigh on global output. The contraction in the Chinese real estate sector, weak consumption, and tepid consumer confidence are causes for concern regarding China’s economic outlook. Furthermore, the IMF warns of potential threats from Russia’s war in Ukraine, which could lead to higher food and energy prices. The recent termination of the agreement allowing Ukrainian grain exports is also a cause for concern. The IMF emphasizes the need to avoid geopolitical tensions fracturing the world economy and impeding multilateral cooperation on global public goods.
In conclusion, while the world economy exhibits signs of resilience, the IMF report stresses the underlying risks that persist. Policymakers and central banks must remain vigilant in pursuing measures to ensure stability, contain inflation, and foster economic growth.
