The world economy is showing signs of resilience this year despite persistent inflation and a sluggish recovery in China, the International Monetary Fund said on Tuesday, raising the odds that a global recession can be avoided barring unexpected crises.
The signs of optimism in the latest edition of the IMF’s World Economic Outlook may also give global policymakers greater confidence that their efforts to contain inflation without causing serious economic damage are working. Global growth, however, remains weak by historical standards, and the fund’s economists warned that serious risks remained.
The IMF raised its forecast for global growth this year to 3 percent, from 2.8 percent in its April forecast. He predicted global inflation would decline from 8.7 percent in 2022 to 6.8 percent this year and 5.2 percent in 2024 as the effects of higher interest rates trickle down around the world.
The outlook was brighter in large part because financial markets, which had been hit by the collapse of several large banks in the United States and Europe, have largely stabilized. Another big financial risk was averted in June when Congress moved to lift the US government’s debt ceiling, ensuring that the world’s largest economy would continue to pay its bills on time.
The new IMF figures come as the Federal Reserve is expected to raise interest rates by a quarter point at its meeting this week, while keeping its future options open. The Federal Reserve has been aggressively raising rates to try to control inflation, raising them from near zero in March 2022 to a range of 5 percent to 5.25 percent today. Policymakers have been trying to cool the economy without crushing it and held rates steady in June to gauge how well the US economy was absorbing the higher borrowing costs the Fed had already approved.
As countries like the United States continue to grapple with inflation, the IMF urged central banks to remain focused on restoring price stability and strengthening financial supervision.
Fed officials will release their July interest rate decision on Wednesday, followed by a press conference with Jerome H. Powell, the Fed Chairman. Policymakers had previously forecast they could raise rates once more in 2023 beyond the move expected this week. While investors are doubtful that they will ultimately make that final rate move, officials are likely to want to see more evidence that inflation is falling and the economy is cooling before committing in either direction.
The IMF said on Tuesday that it expected growth in the United States to slow from 2.1 percent last year to 1.8 percent in 2023 and 1 percent in 2024. It expects consumption, which has remained strong, to start to slow in the coming months as Americans reduce their savings and interest rates rise further.
Growth in the euro zone is projected to be just 0.9 percent this year, dragged down by a contraction in Germany, the region’s largest economy, before rising to 1.5 percent in 2024.
European politicians are still busy fighting to curb inflation. On Thursday, the European Central Bank is expected to raise interest rates for the 20 countries that use the euro to the highest level since 2000. But after a year of raising interest rates, policymakers at the central bank have been trying to shift the focus from how high rates will go to how long they can stay at levels intended to constrain the economy and end domestic inflationary pressures generated by rising wages or corporate profits.
Policymakers have raised rates as the economy has proven a bit more resilient than expected this year, supported by a strong job market and lower energy prices. But the economic outlook remains relatively weak and some analysts expect the European Central Bank to be close to halting interest rate hikes amid signs that its tightening policy stance is hurting economic growth. On Monday, an index of economic activity in the eurozone it fell to its lowest level in eight months in July, as manufacturing contracted further and the service sector slowed.
Next week, the Bank of England is expected to raise interest rates for the 14th consecutive time in an effort to force inflation down in Britain, where prices in June rose 7.9 percent from a year earlier.
Britain has defied some expectations, including those of the IMF economists, by avoiding a recession so far this year. But the country still faces a challenging set of economic factors: Inflation is proving stubbornly persistent in part because a tight job market is driving up wages, while households are increasingly worried about the impact of high interest rates on their mortgages because repayment rates tend to reset every few years.
A weaker-than-expected recovery in China, the world’s second-largest economy, is also weighing on global output. The IMF pointed to a sharp contraction in the Chinese real estate sector, weak consumption and tepid consumer confidence as reasons to worry about China’s prospects.
Official figures released this month showed China’s economy slowed markedly in the spring from the start of the year, as exports plummeted, the real estate slump deepened and some indebted local governments had to cut spending after running out of money.
Despite the reasons for optimism, the IMF report makes it clear that the global economy is in the dark.
Russia’s war in Ukraine remains a threat that could push up global food and energy prices, and the fund said the recently terminated deal allowing the export of Ukrainian grain could spell headwinds.
“The war in Ukraine could escalate, further raising the prices of food, fuel and fertilizers,” the report says. “The recent suspension of the Black Sea Grains Initiative is a concern in this regard.”
He also reiterated his warning not to allow the war in Ukraine and other sources of geopolitical tension to further divide the world economy.
“Such developments could contribute to additional volatility in commodity prices and hinder multilateral cooperation in the provision of global public goods,” the IMF said.