In its latest October World Economic Outlook Report (WEO), the International Monetary Fund (IMF) projects that global growth will slow from 3.5 percent in 2022 to 3.0 percent in 2023 and 2.9 percent in 2024, below the historical (2000-2019) average of 3.8 percent. And the 2024 forecast is 0.1 percentage points lower than the July estimate.
The IMF expects global economic growth in 2023 to be the lowest since 2001 (2.5 percent), except during the global financial crisis and the COVID-19 pandemic, and well below the 3.6 percent average for the global economy from 2000 to 2021. The IMF also put its medium-term growth forecast for the world economy at 3.1 per cent, the lowest in decades. The 2023 forecasts for 143 economies, representing 92% of global GDP, were sharply revised down from the previous forecast in April.
Risks to the global outlook are more balanced than they were six months ago, the IMF said, given the resolution of tensions over the US debt ceiling and decisive action by the Swiss and US governments to contain financial turmoil. "The likelihood of a hard landing has declined, but the risks to global growth remain skewed to the downside." In some places, near-term inflation expectations have risen, and this, combined with a tightening labor market, could lead to persistent core inflation pressures that require higher-than-expected policy rates. At a time of rising debt service costs, more than half of low-income developing countries are already in or likely to be in debt distress." "The report said.
The IMF also stressed that additional climate and geopolitical shocks could lead to further sharp increases in food and energy prices, and that "increased geo-economic fragmentation could constrain commodity flows across markets, leading to more price volatility and increasing the complexity of the green transition." Before the release of the WEO, the Palestinian Islamic Resistance Movement (Hamas) announced on the 7th that it would take military operations code-named "Al-Aqsa Flood" against Israel, and the sudden escalation of the Palestinian-Israeli conflict has led to a rise in international oil prices and European gas prices.
On inflation, the IMF expects global inflation to decline steadily, but still expects inflation in most economies to not return to target until 2025. It is worth mentioning that after the escalation of the Israeli-Palestinian conflict, many analysts worry that the resulting rise in commodity prices could cause the world to experience a third wave of inflation.
Differentiation of economic growth
In addition to lowering its growth forecast, the IMF highlighted the divergence in growth rates among the world's economies. The global recovery from COVID-19 and the conflict between Russia and Ukraine remains slow and uneven, the IMF said. While the global economy has shown resilience earlier this year - growth has rebounded as economies reopen and inflation has fallen since its peak last year - it is too early to let down its guard. Economic activity remains below pre-pandemic levels, especially in emerging markets and developing economies, and regional divisions are widening. Several factors are holding back the recovery. Some of these factors reflect the long-term effects of the pandemic, the Russia-Ukraine conflict, and growing geo-economic divisions. Other factors are more cyclical, including the impact of tighter monetary policy to reduce inflation, the withdrawal of fiscal support in a high-debt environment, and extreme weather events.
Specifically, the IMF expects that the growth rate of advanced economies will fall from 2.6% in 2022 to 1.5% in 2023 and 1.4% in 2024, among which, the growth momentum of the US economy is stronger than expected, and the economic growth rate of this year and next year is expected to be 2.1% and 1.5%, respectively, up 0.3 and 0.5 percentage points from the WEO in July. But growth in the euro zone has been weaker than expected, with growth expected to be 0.7 per cent this year and 1.2 per cent next year, down 0.2 and 0.3 percentage points from July's WEO.
The IMF said growth in the euro zone's major economies was also diverging, with Germany expected to record growth of -0.5% in 2023, down 0.2 percentage points from the July WEO, with a slight contraction in the second half of the year, mainly due to weakness in interest rate sensitive sectors and slowing demand from trading partners. At the same time, the IMF upgraded France's economic growth this year by 0.2 percentage points to 1.0%, as industrial production caught up in the first half of the year and external demand performed well.
For other advanced economies, the IMF also stressed the divergence again, predicting that the UK's growth rate will fall from 4.1% in 2022 to 0.5% in 2023. The IMF said the decline in UK growth reflected the continuing impact of tighter monetary policy and the terms of trade shock from high energy prices. The IMF expects Japan's growth to rise to 2.0 percent in 2023 from 1.0 percent in 2022, up 0.6 percentage points from the July WEOI, boosted by bullish factors such as pent-up demand, a surge in inbound tourism and accommodative monetary policy, as well as a rebound in auto exports that had been held back earlier by supply chain issues.
For emerging market and developing economies, the IMF expects growth to slow slightly overall, from 4.1% in 2022 to 4.0% in 2023 and 2024, with the forecast for 2024 revised down by 0.1 percentage point. Divergence also exists in emerging market and developing economies: emerging and developing Europe, for example, has seen growth revised up by 0.6 percentage points to 2.4 per cent this year; Emerging and developing Asia, on the other hand, will see its economic growth revised downward this year and next, down 0.1 and 0.2 percentage points respectively to 5.2% and 4.8%. Growth in Latin America and the Caribbean is expected to slow from 4.1% in 2022 to 2.3% in 2023, but growth in 2023 and 2024 has been revised up by 0.4 and 0.1 percentage points, respectively. Growth in the Middle East and Central Asia is expected to slow from 5.6% in 2022 to 2.0% in 2023 before recovering to 3.4% in 2024, with the 2023 growth forecast revised down by 0.5 percentage points but the 2024 growth forecast revised up by 0.2 percentage points. In sub-Saharan Africa, growth is expected to slow to 3.3% in 2023 and recover to 4.0% in 2024, with forecasts revised down by 0.2 percentage points and 0.1 percentage points, respectively, and growth still below the historical average of 4.8%.
Because of these complications, the IMF says there is little room for policy error. Global central banks need to restore price stability while using policy tools as needed to mitigate underlying financial stresses. Effective monetary-policy frameworks and policy communication are critical to anchoring expectations and minimizing the loss of output to lower inflation. Fiscal policymakers should rebuild budget space to gain room for manoeuvre and remove ill-targeted measures while protecting the vulnerable. Reforms to reduce structural barriers to growth, such as encouraging labor-market participation, would help bring inflation down steadily to target levels and help reduce debt. There is a need for faster and more effective multilateral coordination in addressing the debt issue to avoid debt distress. Cooperation is also needed to mitigate the effects of climate change and accelerate the green transition, including by ensuring stable cross-border flows of essential minerals.
Inflation is expected to fall faster in advanced economies than in developing ones
The IMF expects global inflation to decline steadily from 8.7 per cent in 2022 to 6.9 per cent in 2023 and 5.8 per cent in 2024, but forecasts for 2023 and 2024 have been revised upwards by 0.1 and 0.6 percentage points, respectively, and inflation is not expected to return to target in most economies until 2025.
Headline inflation is expected to decline in 2023 in nearly three-quarters of economies, but the pace of deinflation is particularly pronounced in advanced economies, where it is projected to fall 2.7 percentage points in 2023, about twice as much as the 1.3 percentage point decline in overall inflation expectations in emerging market and developing economies. This divergence partly reflects that advanced economies have benefited from stronger monetary policy frameworks and communication, both of which have helped to curb inflation, and that they are less exposed to commodity price and exchange rate shocks than emerging market economies. In low-income developing countries, inflation is expected to average double digits and is not expected to start falling until 2024.
Inflation is diverging not only between advanced and developing economies, but also among the world's major economies. The IMF expects inflation in the euro area to fall sharply by 6.6 percentage points (year-on-year) in 2023, from 9.9% in the fourth quarter of 2022 to 3.3% in the fourth quarter of 2023, partly reflecting lower energy prices. In the United States, inflation peaked earlier and is forecast to fall 3.9 percentage points year on year, from 7.1 percent in the fourth quarter of 2022 to 3.2 percent in the fourth quarter of 2023.
Moreover, the IMF expects core inflation to decline more slowly and gradually than headline inflation. The 0.6 percentage point increase in the headline inflation forecast for 2024 was also due to higher-than-expected core inflation, the IMF said. Globally, the IMF expects core inflation to fall from 6.4 percent in 2022 (annual average) to 6.3 percent in 2023 and 5.3 percent in 2024, up 0.3 percentage points and 0.6 percentage points respectively from the July WEO. The drivers of the upward revisions vary from economy to economy, but generally reflect a still-tight labor market and higher-than-expected service sector inflation.