IMF forecast: outlook for global economy brightens - "not enough"

The global economy will cope with the consequences of the war in Ukraine and the continued high inflation somewhat better than initially feared.

IMF forecast: outlook for global economy brightens - "not enough"

The global economy will cope with the consequences of the war in Ukraine and the continued high inflation somewhat better than initially feared. Last but not least, the end of the corona lockdown in China gives hope, according to the updated forecast of the International Monetary Fund (IMF) on the global economy. "The global economic outlook has not deteriorated this time. This is good news, but not enough," said IMF chief economist Pierre-Olivier Gourinchas at the presentation of the report in Singapore. The road to full recovery has only just begun.

Growth will slow to 2.9 percent this year compared to 2022 (3.4 percent). But the prospects are "less gloomy" than assumed in October, emphasized Gourinchas. The reason for this are "positive surprises" and an "unexpectedly high level of resilience" in numerous economies, according to the report. A driver of the global economy could be China's departure from the zero-Covid strategy.

Global risks persist

The IMF does not expect the global economy to slide into recession this year - an option that the economists did not rule out in the autumn. According to Gourinchas, the current forecast could mark a "tipping point" with growth bottoming out while inflation eases. Should China make faster progress with the vaccination against the corona virus, this would ensure a recovery.

However, the report also lists a number of risks that would result in a deterioration in the economic situation: a further worsening of the corona situation in China, an escalation of the Russian war of aggression in Ukraine and a debt crisis due to the strict monetary policy of the central banks.

In its updated forecast, the IMF expects global growth of 2.9 percent this year. That's 0.2 percentage points more than assumed in October - but compared to the past two decades, growth is below the "historical average". Growth of 3.1 percent is expected for 2024.

Europe coped surprisingly well with the energy crisis

For the euro zone, the IMF is forecasting growth of 0.7 percent this year - growth that is 0.2 percentage points higher than previously assumed. In Germany, gross domestic product (GDP) is only expected to grow by 0.1 percent in 2023 - but that is an increase of 0.4 percentage points in the estimate. In the coming year, the economy in Germany is then expected to grow by 1.4 percent - that is 0.1 percentage points less than previously expected.

"The forecast for low growth in 2023 reflects the rate hikes by central banks in the fight against inflation - especially in developed countries - as well as the war in Ukraine," the forecast said. A decline in growth is forecast for around 90 percent of industrialized countries this year.

According to the report, the fact that the global economy is now expected to grow faster than assumed in October is also due to the fact that Europe has coped with the energy crisis caused by the war in Ukraine better than expected. In general, despite strong headwinds, gross domestic product in the third quarter of 2022 was surprisingly strong in numerous economies - including the United States and the euro area.

Inflation remains high

According to the IMF, the rate hikes by the central banks also had an effect. There are signs that the tight monetary policy is slowing down inflation. "But the full effect will probably not be felt before 2024," the forecast continued. However, more than 80 percent of the countries are likely to have lower consumer prices this year than last year. The IMF warned that the central banks would have to keep tightening interest rates.

For 2023, the IMF expects an inflation rate of 6.6 percent worldwide, and in the coming year it should be 4.3 percent. Nevertheless, it will take a while before prices are stable again with an inflation rate of around two percent. In the vast majority of countries, inflation in 2024 will still be above pre-coronavirus levels. "The latest news about inflation is encouraging. But the battle is far from over," warned IMF chief economist Gourinchas.

All eyes are now likely to be on China. Gourinchas stressed that the sudden reopening of the country has paved the way for a rapid economic recovery in many states. However, this could falter if the economy in China weakens more than expected due to severe corona waves or further deterioration in the real estate sector. At the moment, however, one assumes that the economy will stabilize. According to the IMF, growth in the country in 2022 was 3 percent. It was the first time in more than 40 years that China's growth has been below the world average.