IMF Warns of Weak and Patchy Global Economic Growth, Elevated Food Prices, and Inflation Risks
The International Monetary Fund (IMF) has stated that while central banks have a better chance of managing inflation without causing a global recession, economic growth remains weak and uneven. The IMF predicts that the global economy will expand by 3% this year, in line with its July forecast, thanks to stronger-than-expected growth in the United States. However, downgrades to the outlook for China and Europe have caused the agency to shave its growth forecast for 2024 by 0.1 percentage points to 2.9%.
IMF Chief Economist Pierre-Olivier Gourinchas mentioned that it is still too early to determine the impact of the conflict between Israel and Hamas on economic growth in the region and the rest of the world. He highlighted the resilience of the global economy to the challenges posed by the pandemic and the war in Ukraine. However, he acknowledged that economic activity has slowed and warned of risks that remain “tilted to the downside.”
The IMF’s projections for growth and inflation are increasingly aligning with a “soft landing” scenario, particularly in the United States. The agency revised its growth forecasts for the US economy to 2.1% in 2023 and 1.5% in 2024, higher than previously anticipated. In contrast, Europe and China are expected to have weaker recoveries compared to three months ago. The eurozone is forecasted to grow collectively by 0.7% this year and 1.2% next year, with China’s growth projected to be 5% this year and 4.2% in 2024.
While inflation is expected to fall, the IMF does not anticipate it to return to levels targeted by central banks until 2025 in most cases. The agency revised its global inflation forecasts to 6.9% this year and 5.8% next year, a slight increase from previous estimates. Gourinchas warned that commodity prices, especially food prices, pose a serious risk to the inflation outlook and could be further disrupted by an escalation of the war in Ukraine.
In other news, the conflict between Israel and Hamas has caused oil prices to surge on concerns of wider instability in the oil-producing Middle East. Brent crude prices were already elevated due to supply cuts by major producers Saudi Arabia and Russia. The increase in oil prices could lead to a new round of inflation as energy costs skyrocket. The IMF notes that a 10% increase in oil prices could result in a 0.4 percentage point rise in global inflation.
Bond investors are also on edge, as they anticipate central banks to keep interest rates higher for longer to combat inflation. The IMF warns that high inflation expectations could become a self-fulfilling prophecy as businesses and households raise prices and demand higher wages. Strong inflation expectations could keep inflation rates elevated and hinder central banks’ ability to achieve a soft landing.
Additionally, the IMF highlights concerns about financial stability risks, noting that while stress in the banking sector has eased, higher interest rates are beginning to take a toll on the repayment capacity of corporate and household borrowers. The agency urges policymakers to assess the impact of a sharp fall in real estate prices on financial institutions, as vulnerabilities in the commercial real estate sector pose a significant risk.
Overall, the IMF’s report emphasizes the challenges faced by the global economy, including weak and uneven growth, elevated food prices, and inflation risks. It underscores the need for careful monitoring and policy adjustments to ensure a stable and sustainable recovery.