IMF raises growth outlook for first time in a year, expects inflation has peaked
Economies in North America, Eurozone have shown a surprising resiliency
The International Monetary Fund says the outlook for the global economy has become rosier for the first time in a year amid positive signs from China's reopening and economic resilience in other parts of the world.
The IMF is now projecting that world economic growth will fall from 3.4 per cent in 2022 to 2.9 per cent in 2023, which stands at least 0.2 percentage points higher than the forecast the organization made in October 2022. Growth is then expected to rebound to a pace of 3.1 per cent in 2024.
“The rise in central bank rates to fight inflation and Russia's war in Ukraine continue to weigh on economic activity,” said the report, published Tuesday. “The rapid spread of COVID-19 in China dampened growth in 2022, but the recent reopening has paved the way for a faster-than-expected recovery.”
The IMF also expects the tide to turn on inflation, arguing that it peaked in 2022 at 8.8 per cent. The Washington-based organization forecasts it will slide to 6.6 per cent this year before falling further to 4.3 per cent in 2024.
Authors of the report warned that the balance of risks still pointed to the downside, due to factors such as Russia's invasion of Ukraine and the affect of aggressive central bank rate hikes. However, the authors further noted that these risks weren't as severe as they had been when the IMF made its predictions in October 2022.
Then, IMF analysts had slashed the 2023 outlook growth to 2.7 per cent from 2.9 per cent, warning that high inflation and rising interest rates could plunge some countries into a recession. At the time, authors called the reading the weakest growth profile since 2001, outside the global financial crisis.
Major chief executives and economists shared the same foreboding view, expecting that the mix of high rates and rampant inflation, on top of continued supply chain snarls and China's ZERO-COVID policy, would bring economies to heel.
But that hasn't happened yet, and economies in North America and the Eurozone have been surprisingly resilient.
The Bank of Canada hiked its policy rate a total of 4.25 percentage points to 4.5 per cent, but it didn't stop the economy from eking out 0.1 per cent growth in November. However, the economy is slowing under the weight of aggressive rate hikes, growing at half the pace of the previous quarter. The labour market also remained robust with 104,000 new positions added in December. The next jobs reading is expected on Feb. 10.
Similarly in the U.S., the economy managed to grow by 2.1 per cent in 2022 even after the U.S. Federal Reserve raised the federal funds rate a cumulative 425 basis points to a range of 4.25 per cent to 4.50 per cent. The Fed will hold its next rate decision on Wednesday, when many economists are expecting another hike.
The data brought an optimistic shift in tone among market watchers, with the potential of a “soft landing” back on the table.
The IMF report said the Eurozone has also managed to avoid a worst-case scenario with stronger-than-expected 1.2 per cent gross domestic product growth in 2022. Economic reopenings and a warmer-than-expected winter amid energy insecurity concerns contributed to the stronger results.
Among the Group of Seven, Britain will be the only member whose economy will shrink this year, with a contraction of 0.6 per cent, the IMF said. That makes Britain's outlook even worse than sanctions-hit Russia, which is expected to expand by 0.3 per cent after contracting 2.2 in 2022.
The IMF did not downgrade any other G-7 economy this year.
Despite the positive signs, the IMF said interest rate increases have yet to fully work their way through the global economy. It argued countries should keep fighting inflation and that any fiscal support should be focused on aiding those who are more vulnerable to rising food and energy prices.