IMF raises world economic outlook for the first time in a year

Central banks’ interest-rate hikes and Russia’s invasion of Ukraine will continue to weigh on economic activity this year amid a protracted inflation crisis, the Washington-based institution said.

The fund sees world consumer-price increases slowing to 6.6pc this year, 0.1 percentage point higher than the October projection, following 8.8pc in 2022. It forecast further slowing to 4.3pc in 2024. Inflation rates are expected to be lower in about 84pc of countries in 2023 than in 2022.

“The outlook is not worsened this time around, which in itself is good news,” chief economist Pierre-Olivier Gourinchas said. The fund cut its 2023 outlook three times last year. “But it’s not enough. There are still some challenges to get on our way to a sustainable recovery that is broad and long-lasting.”

The fight against inflation is not yet won: Monetary policy will need to remain contractionary, and some countries will need to tighten further before there’s a slowdown in broad measures of cost of living increases, Gourinchas said in a briefing.

Downside risks include China’s recovery stalling, the war in Ukraine escalating, and more emerging and developing economies entering debt distress.

Inflation also could prove more persistent. Financial markets may become volatile, and international tensions spurred by Russia’s aggression could cause the global system to fragment, hampering cooperation between nations.

Yet the risks are more balanced than in October, Gourinchas said. One upside risk is stronger consumption, particularly in services, fuelled by pent-up demand from tight labour markets and government pandemic fiscal support. Conversely, inflation could fall faster than expected amid the shift in spending to services, allowing central banks to tighten less.

“We’re well away from any kind of global recession marker,” although the risks materializing could change that, Gourinchas said.

The IMF boosted its forecast for emerging-market and developing economies, saying they will grow 4pc, a 0.3 percentage-point upgrade from October and compared with 3.9pc for 2022. It raised the estimate for China’s expansion by 0.8 percentage point to 5.2pc.

China and India will account for about half of world growth in 2023, Gourinchas said.

The IMF’s slightly more upbeat tone contrasts with a more dire view from its sister Bretton Woods institution, the World Bank. The development lender on Jan. 10 slashed its growth forecasts for most countries and regions, and warned that new adverse shocks could tip the global economy into a recession.

Gourinchas said that part of the difference is explained by the IMF’s use of purchasing-power-parity weights, which give a greater emphasis to emerging-market economies, differing from the World Bank’s use of market-based exchange rates.

The World Bank is also more pessimistic than the IMF on growth in advanced economies and European economies, he said.