IMF Chief Sees Growth Headwinds For Major Economies, Warns Battle Against Inflation Not Yet Won

The International Monetary Fund (IMF) has revised its global growth forecast, projecting a slowdown from last year’s 3.5% to 3% for this year and the next in its latest World Economic Outlook update.

The 2023 growth projection has been revised 0.2 percentage points higher from the IMF’s previous projection from April. Global inflation is also expected to decrease, going from 8.7% last year to 6.8% this year and further declining to 5.2% in 2024.

Pierre-Olivier Gourinchas, economic counsellor and the director of research of the IMF, said in a blog post that the brunt of this slowdown is concentrated in advanced economies, where growth is expected to plummet from 2.7% in 2022 to a mere 1.5% this year, remaining subdued at 1.4% next year.

The U.S. economy is predicted to grow by 1.8% this year and 1% in 2024, while the euro area, still grappling with the aftermath of last year’s surge in gas prices caused by the Russia-Ukraine war, is set to decelerate significantly. The German economy is the only major economy expected to contract by 0.3% this year.

IMF Continues To See Inflation Risks Ahead

While some adverse risks have moderated, the balance remains tilted to the downside, according to Gourinchas.

The report points out two critical areas of concern. First, there are signs indicating that global economic activity is losing momentum. This is attributed to the global tightening of monetary policy, which has led to contractionary territory in policy rates.

Secondly, core inflation, which excludes energy and food prices, remains significantly above central banks’ targets. It is projected to gradually decrease from 6% this year to 4.7% in 2024. Notably, core inflation in advanced economies is expected to remain stable at an average annual rate of 5.1% this year, with a decline to 3.1% in 2024. This indicates the battle against inflation is far from over.

Touchdown May Prove Quite Tricky to Execute

“Hopefully, with inflation starting to recede, we have entered the final stage of the inflationary cycle that started in 2021. But hope is not a policy, and the touchdown may prove quite tricky to execute,” Gourinchas wrote.

The IMF said the main objective remains to achieve consistent reduction in inflation rates while also safeguarding financial stability. Consequently, central banks must maintain their emphasis on reestablishing stable prices.

According to the IMF, fiscal buffers must also be rebuilt. “It is now time to gradually restore fiscal buffers and put debt dynamics on a more sustainable footing,” said Gourinchas.