Global growth set to stay at historic low, says IMF

Tentative signs in early 2023 that the world economy could achieve a soft landing -- with inflation coming down and growth steady -- have receded amid stubbornly high inflation and recent financial sector turmoil, says IMF's World Economic Outlook report. 

The baseline forecast, which assumes that the recent financial sector stresses are contained, is for growth to fall from 3.4 percent in 2022 to 2.8 percent in 2023, before rising slowly and settling at 3.0 percent next year -- the lowest medium-term forecast in decades. 

Advanced economies are expected to see an especially pronounced growth slowdown, from

2.7 percent in 2022 to 1.3 percent in 2023. 

Although inflation has declined as central banks have raised interest rates and food and energy prices have come down, underlying price pressures are proving sticky, with labor markets tight in a number of economies, the outlook says. 

Side effects from the fast rise in policy rates are becoming apparent, as banking sector vulnerabilities have come into focus and fears of contagion have risen across the broader financial sector, including nonbank financial institutions. Policymakers have

taken forceful actions to stabilise the banking system.

The other major forces that shaped the world economy in 2022 seem set to continue into this year, but with changed intensities. Debt levels remain high, limiting the ability of fiscal policymakers to respond to new challenges, it says. 

Commodity prices that rose sharply following Russia’s invasion of Ukraine have moderated, but the war continues, and geopolitical tensions are high. 

Infectious Covid-19 strains caused widespread outbreaks last year, but economies

that were hit hard -- most notably China -- appear to be recovering, easing supply-chain disruptions.

Despite the fillips from lower food and energy prices and improved supply-chain functioning, risks are firmly to the downside with the increased uncertainty

from the recent financial sector turmoil.

In a plausible alternative scenario with further financial sector stress, global growth declines to about 2.5 percent in 2023 -- the weakest growth since the global downturn of 2001, barring the initial Covid-19 crisis in 2020 and during the global financial crisis in 2009––with advanced economy growth falling below 1 percent.

The anemic outlook reflects the tight policy stances needed to bring down inflation, the fallout from the recent deterioration in financial conditions, the ongoing war in Ukraine, and growing geoeconomic fragmentation. 

Global headline inflation is set to fall from 8.7 percent in 2022 to 7.0 percent in 2023 on

the back of lower commodity prices, but underlying (core) inflation is likely to decline more slowly. Inflation’s return to target is unlikely before 2025 in most cases. Once inflation rates are back to targets, deeper structural drivers will likely reduce interest rates toward their pre-pandemic levels.

Risks to the outlook are heavily skewed to the downside, with the chances of a hard landing having risen sharply. Financial sector stress could amplify and contagion could take hold, weakening the real economy through a sharp deterioration in financing conditions and compelling central banks to reconsider their policy paths. Pockets of sovereign debt distress could, in the context of higher borrowing costs and lower growth, spread and become more systemic. The war in Ukraine could intensify and lead to more food and energy price spikes, pushing inflation up. Core inflation could turn out more persistent than anticipated, requiring even more monetary tightening to tame.

Fragmentation into geopolitical blocs has the scope to generate large output losses, including through its effects on foreign direct investment.

Policymakers have a narrow path to walk to improve prospects and minimize risks. Central banks need to remain steady with their tighter anti-inflation stance, but also be ready to adjust and use their full set of policy instruments -- including to address financial stability concerns -- as developments demand.

Fiscal policymakers should buttress monetary and financial policymakers’ actions in getting inflation back to target while maintaining financial stability. In most cases, governments should aim for an overall tight stance while providing targeted support to those

struggling most with the cost-of-living crisis. 

In a severe downside scenario, automatic stabilisers should be allowed to operate fully and temporary support measures be utilised as needed, fiscal space permitting.

Medium-term debt sustainability will require welltimed fiscal consolidation but also debt restructuring in some cases. Currencies should be allowed to adjust to changing fundamentals, but deploying capital flow management policies on outflows may be warranted in crisis or imminent crisis circumstances, without substituting for needed macroeconomic policy adjustment. 

Measures to address structural factors impeding supply could ameliorate medium-term growth. Steps to strengthen multilateral cooperation are essential to make progress in creating a more resilient world economy, including by bolstering the global financial safety net, mitigating the costs of climate change, and reducing the adverse effects of geoeconomic fragmentation. -TradeArabia News Service

Source: https://www.tradearabia.com/news/BANK_408362.html