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The International Monetary Fund (IMF) sees better odds that central banks will manage to tame inflation without tipping the global economy into recession, but it warned Tuesday that growth remained weak and patchy.
The agency said it expected the world’s economy to expand by 3% this year, in line with its July forecast, as stronger-than-expected growth in the United States offset downgrades to the outlook for China and Europe. It shaved its forecast for growth in 2024 by 0.1 percentage point to 2.9%.
IMF chief economist Pierre-Olivier Gourinchas told journalists it was too early to assess how the latest conflict between Israel and Hamas — which has now claimed at least 900 lives in Israel alone — could affect economic growth in the region and the rest of the world. He said the IMF was monitoring the situation, noting that the agency’s latest World Economic Outlook had been finalized before fighting broke out.
Echoing comments made in July, the IMF highlighted the global economy’s resilience to the twin shocks of the pandemic and the Ukraine war while warning in its report that risks remained “tilted to the downside.”
“Despite war-disrupted energy and food markets and unprecedented monetary tightening to combat decades-high inflation, economic activity has slowed but not stalled,” Gourinchas wrote in a blog post. “The global economy is limping along,” he added.
The IMF’s projections for growth and inflation are “increasingly consistent with a ‘soft landing’ scenario… especially in the United States,” Gourinchas continued.
But he cautioned that growth “remains slow and uneven,” with weaker recoveries now expected in much of Europe and China compared with predictions just three months ago.
The 20 countries using the euro are expected to grow collectively by 0.7% this year and 1.2% next year, a downgrade of 0.2 percentage points and 0.3 percentage points respectively from July.
The IMF now expects China to grow 5% this year and 4.2% in 2024, down from 5.2% and 4.5% previously.
“China’s property sector crisis could deepen, with global spillovers, particularly for commodity exporters,” it said in its report
By contrast, the United States is expected to grow more strongly this year and next than expected in July. The IMF upgraded its growth forecasts for the US economy to 2.1% in 2023 and 1.5% in 2024 — an improvement of 0.3 percentage points and 0.5 percentage points respectively.
“The strongest recovery among major economies has been in the United States,” the IMF said.
The agency expects that inflation will continue to fall — bolstering the case for a “soft landing” in major economies — but it does not expect it to return to levels targeted by central banks until 2025 in most cases.
The IMF revised its forecasts for global inflation to 6.9% this year and 5.8% next year — an increase of 0.1 percentage point and 0.6 percentage points respectively.
Commodity prices pose a “serious risk” to the inflation outlook and could become more volatile amid climate and geopolitical shocks, Gourinchas wrote.
“Food prices remain elevated and could be further disrupted by an escalation of the war in Ukraine, inflicting greater hardship on many low-income countries,” he added.
Oil prices surged Monday on concerns that the latest conflict between Israel and Hamas could cause wider instability in the oil-producing Middle East. Brent crude prices were already elevated following supply cuts by major producers Saudi Arabia and Russia.
High oil and natural gas prices, leading to skyrocketing energy costs, helped drive inflation to multi-decade highs in many economies in 2022. The latest jump in oil prices could cause a fresh bout of broader price rises.
Gourinchas said Tuesday that it was difficult to assess how sustained the impact on oil prices would be. The IMF’s models suggest that a 10% increase in oil prices would lift global inflation by around 0.4 percentage points. “But I emphasize that it’s really too early to jump to any conclusions here,” he added.
Bond investors are already on edge. They dumped government bonds last week in the expectation that the world’s major central banks would keep interest rates “higher for longer” to bring inflation down to their targets.
The IMF also pointed to concerns that high inflation could become a self-fulfilling prophecy. If households and businesses expect prices to go on rising, that could cause them to set higher prices for their goods and services, or demand higher wages.
“Expectations that future inflation will rise could feed into current inflation rates, keeping them high,” the IMF noted.
It added that the “expectations channel is critical to whether central banks can achieve the elusive ‘soft landing’ of bringing the inflation rate down to target without a recession.”
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