The global economy is showing signs of resilience this year despite continued inflation and a sluggish recovery in China, the International Monetary Fund said on Tuesday.
The signs of optimism in the IMF’s latest World Economic Outlook may also give global policymakers more confidence that their efforts to contain inflation without causing serious economic damage are working. However, global growth remains meager by historical standards, and the fund’s economists warned that serious risks remain.
The IMF raised its forecast for global growth this year to 3 percent, from 2.8 percent in the April projection. It predicted global inflation would ease from 8.7 percent in 2022 to 6.8 percent this year and 5.2 percent in 2024 as the effects of higher interest rates spill over around the world.
The outlook was brighter in large part as financial markets – which had been rocked by the collapse of several major banks in the United States and Europe – have largely stabilised. Another major financial risk was averted in June when Congress lifted the US government’s borrowing ceiling so that the world’s largest economy could continue to pay its bills on time.
The new IMF numbers come as the Federal Reserve is widely expected to raise interest rates by a quarter point at its meeting this week, while keeping its options open for the future. The Fed has aggressively raised rates to try and contain inflation, from near zero in March 2022 to a range of 5 percent to 5.25 percent today. Policymakers have tried to cool the economy without crushing it and held interest rates steady in June to assess how the US economy was absorbing the higher borrowing costs that the Fed had already approved.
As countries like the United States continue to struggle with inflation, the IMF urged central banks to continue to focus on restoring price stability and strengthening financial supervision.
Fed officials will announce their July rate decision on Wednesday, followed by a press conference with Fed Chairman Jerome H. Powell. Policymakers had previously predicted they could raise rates again in 2023 after the expected move this week. While investors doubt they will eventually make that final price move, officials will likely want to see more evidence that inflation is falling and the economy is cooling before moving in any direction.
The IMF said Tuesday it expected growth in the United States to slow from 2.1 percent last year to 1.8 percent in 2023 and 1 percent in 2024. It expects consumption, which has remained strong, to begin to ease in the coming months as Americans withdraw their savings and interest rates continue to rise.
Growth in the eurozone is expected to be just 0.9 percent this year, slowed by a contraction in Germany, the region’s largest economy, to pick up again to 1.5 percent in 2024.
European policymakers are still fighting to curb inflation. On Thursday, the European Central Bank is expected to raise interest rates for the 20 countries that use the euro to the highest level since 2000. But after a year of rate hikes, policymakers at the central bank have tried to shift focus from how high rates will go to how long they can remain at levels designed to slow down the economy and stamp out domestic inflationary pressures from rising wages or corporate profits.
Policymakers have raised rates as the economy has proved somewhat more resilient than expected this year, supported by a strong labor market and lower energy prices. But the economic outlook is still relatively weak and some analysts expect the European Central Bank to be on the verge of halting rate hikes, while there are signs that its restrictive policy stance is weighing on economic growth. On Monday, an index of economic activity in the eurozone fell to its lowest level in eight months in July as the manufacturing sector contracted further and the services sector slowed.
Next week, the Bank of England is expected to raise rates for the 14th consecutive time in a bid to dampen inflation in Britain, where prices rose 7.9 percent in June from a year earlier.
Britain has beaten some expectations, including those of economists at the IMF, by avoiding a recession so far this year. But the country still faces some challenging economic factors: inflation is proving stubbornly stubborn, in part because a tight labor market is driving up wages, while households are increasingly concerned about the impact of high interest rates on their mortgages as amortization rates tend to be revised every few years.
A weaker-than-expected recovery in China, the world’s second-largest economy, is also weighing on global output. The IMF pointed to a sharp contraction in China’s real estate sector, weak consumption and lukewarm consumer confidence as reasons for concern about China’s prospects.
Official figures released this month showed that China’s economy slowed significantly in the spring from earlier in the year, as exports plummeted, the real estate crisis deepened and some debt-ridden local governments had to cut spending because they were short on cash.
Despite reasons for optimism, the IMF report makes it clear that the global economy is not clear.
Russia’s war in Ukraine continues to pose a threat that could send global food and energy prices soaring, and the fund noted that the recently-terminated agreement allowing exports of Ukrainian grain could portend headwinds.
“The war in Ukraine could intensify, further driving up prices for food, fuel and fertilizer,” the report said. “The recent suspension of the Black Sea Grain Initiative is of concern in this regard.”
It also reiterated its warning against allowing the war in Ukraine and other sources of geopolitical tension to further fragment the global economy.
“Such developments could contribute to additional volatility in commodity prices and hinder multilateral cooperation in the delivery of global public goods,” the IMF said.