IMF discusses inflation trends in the global economy
The International Monetary Fund’s chief economist has warned the global economy is facing a perilous phase. Pierre-Olivier Gourinchas said: “We are… entering a perilous phase during which economic growth remains low by historical standards and financial risks have risen, yet inflation has not yet decisively turned the corner.”
The IMF today downgraded its outlook for global economic growth. It now envisions growth this year of 2.8 percent, down from 3.4 percent in 2022 and from the 2.9 percent estimate for 2023 it made in its previous forecast in January.
The fund said the possibility of a “hard landing”, in which rising interest rates weaken growth to the extent they cause a recession, has “risen sharply”, especially in the world’s wealthiest countries.
Those conditions are also increasing the risks to global financial stability, the IMF warned.
Mr Gourinchas told reporters on Tuesday: “Below the surface, turbulence is building and the situation is quite fragile as the recent bout of banking instability reminded us.
IMF chief Kristalina Georgieva (centre) (Image: Getty)
Pierre-Olivier Gourinchas (Image: Getty)
“Inflation is much stickier than anticipated even a few months ago. While global inflation has declined, that reflects mostly the sharp reversal in energy and food prices.
“But core inflation, excluding the volatile energy and food components, has not yet peaked in many countries.”
The IMF, a 190-country lending organisation, is forecasting seven percent global inflation this year, down from 8.7 percent in 2022 but up from its January forecast of 6.6 percent for 2023.
Persistently high inflation is expected to force the US Federal Reserve and other central banks to keep raising rates and to keep them at or near a peak longer to combat surging prices.
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A view of the US Federal Reserve (Image: Getty)
A delegate at the IMF’s spring meetings in Washington DC (Image: Getty)
Those ever-higher borrowing costs are expected to weaken economic growth and potentially destabilize banks, which had come to rely on historically low rates.
The fund’s annual Global Financial Stability Report, also released on Tuesday, issued recommendations for international decision-makers.
It said: “Policymakers may need to adjust the stance of monetary policy to support financial stability.”
This would mean a possible rethinkover the pace of interest rate hikes, which are intended to cool inflation.
A view of Shanghai Pudong International Airport as China lifts Covid travel restrictions (Image: Getty)
The fund foresees a 25 percent likelihood that global growth will fall below two percent for 2023.
That has happened only five times since 1970, most recently when COVID-19 derailed global commerce in 2020.
The IMF also envisions a 15 percent possibility of a “severe downside scenario”, often associated with a global recession, in which worldwide economic output per person would shrink.
The fund issued modest upgrades to the economies of the United States and Europe, which have proved more resilient than expected even with much higher interest rates and the shock of Russia’s invasion of Ukraine.
US Treasury Secretary Janet Yellen (Image: Getty)
The fund now expects the United States to grow 1.6 percent this year, down from 2.1 percent in 2022, but up from the 1.4 percent expansion the IMF had predicted in January.
A robust US jobs market has supported steady consumer spending despite higher borrowing rates for homes, cars and other major purchases.
US Treasury Secretary Janet Yellen shared a more optimistic view on the state of the US economy and the banking system, which she said “remains sound”.
She said: “I wouldn’t overdo the negativism about the global economy. I think countries have proven resilient, and a number of emerging-market and lower-income countries continue to show resilient growth.”
China, the world’s second-biggest economy, is expected to grow 5.2 percent this year, unchanged from the IMF’s January forecast.
The country is rebounding from the end of a draconian zero-Covid policy which had kept people home and had hobbled economic activity.
In the UK, where double-digit inflation is straining household budgets, the economy is expected to contract 0.3 percent this year.
But even that is an upgrade from the 0.6 percent drop the IMF had predicted in January for Britain.
Chancellor Jeremy Hunt said in a statement: “Thanks to the steps we have taken, the OBR says the UK will avoid recession and our IMF growth forecasts have been upgraded by more than any other G7 country.
“The IMF now say we are on the right track for economic growth. By sticking to the plan we will more than halve inflation this year, easing the pressure on everyone.”
