Global Economic Recovery Endures but the Road Is Getting Rocky
IMF Blog, April 11, 2023
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- Authors: Pierre-Olivier Gourinchas
- Published: April 11, 2023
Recovery status and near-term outlook
- The global economy’s gradual recovery from both the pandemic and Russia’s invasion of Ukraine remains on track.
- China’s reopened economy is rebounding strongly.
- Supply chain disruptions are unwinding; dislocations to energy and food markets caused by the war are receding.
- The massive and synchronized tightening of monetary policy by most central banks should start to bear fruit, with inflation moving back towards targets.
Short-term forecasts and key statistics
- Global growth is forecast to bottom out at 2.8 percent this year before rising modestly to 3 percent next year—0.1 percentage points below January projections.
- Global inflation: 8.7 percent last year, 7 percent this year, and 4.9 percent in 2024.
- Core inflation (year-end to year-end) is expected to slow to 5.1 percent this year, a sizeable upward revision of 0.6 percentage points from the January update.
- This year’s slowdown is concentrated in advanced economies:
- Euro area growth expected to fall to 0.8 percent this year before rebounding to 1.4 percent.
- United Kingdom growth expected to fall to -0.3 percent this year before rebounding to 1 percent.
- Emerging market and developing economies: year-end to year-end growth accelerating to 4.5 percent in 2023 from 2.8 percent in 2022.
Downside scenarios and financial risks
- Severe downside “risk-off” scenario: global growth could slow to 1 percent this year, implying near stagnant income per capita; estimated probability of such an outcome about 15 percent.
- Banking-financial stress scenario in the World Economic Outlook: banks, facing rising funding costs and acting more prudently, cut lending further, leading to an additional 0.3 percent reduction in output this year.
- Recent banking instability highlights vulnerabilities:
- Sizable losses on long-term fixed-income assets and higher funding costs from rapid monetary tightening.
- Examples include brief instability in the United Kingdom’s gilt market and recent banking turbulence in the United States.
- Financial institutions with excess leverage, credit risk, interest rate exposure, dependence on short-term funding, or located in jurisdictions with limited fiscal space could become targets.
- Trade-offs in labor and inflation dynamics:
- Core inflation has not yet peaked in many countries despite declines in headline inflation driven by energy and food prices.
- Labor markets remain very strong in most advanced economies: nominal wage gains lag price increases (real wages declining now), but labor demand is strong and labor supply remains weak—suggesting real wages should increase over time.
- Corporate margins have surged and may absorb much of rising labor costs, provided inflation expectations remain well-anchored.
Medium-term trends and structural concerns
- Five-year ahead growth projections declined from 4.6 percent in 2011 to 3 percent in 2023.
- Part of the decline reflects expected convergence (e.g., China, Korea), but recent slowdown may reflect:
- Scarring from the pandemic.
- A slower pace of structural reforms.
- Rising and increasingly real threat of geoeconomic fragmentation leading to more trade tensions, less direct investment, and slower innovation and technology adoption across fragmented “blocks.”
- A fragmented world is unlikely to achieve progress for all, or to successfully tackle global challenges such as climate change or pandemic preparedness.
Policy recommendations
- Monetary policy:
- With financial instability contained, keep monetary policy focused on bringing inflation down, while standing ready to quickly adjust to financial developments.
- Banking turmoil will help slow aggregate activity as banks curtail lending, partially mitigating the need for further monetary tightening; avoid expectations that central banks will prematurely surrender the inflation fight.
- Fiscal policy:
- Tighter fiscal policy can cool economic activity and support monetary policy, allowing real interest rates to return faster to a low natural level.
- Appropriately designed fiscal consolidation will help rebuild buffers and strengthen financial stability.
- While fiscal policy is turning less expansionary in many countries this year, more could be done to regain fiscal space.
- Financial regulation and international support:
- Regulators and supervisors should strengthen oversight and actively manage market strains to prevent remaining financial fragilities from morphing into a full-blown crisis.
- For emerging market and developing economies, ensure proper access to the Global Financial Safety Net, including IMF precautionary arrangements, access to the US Federal Reserve Foreign and International Monetary Authorities repo facility, or to central bank swap lines, where relevant.
- Exchange rates should be allowed to adjust as much as possible unless doing so raises financial stability risks or threatens price stability, in line with the Integrated Policy Framework.
This blog is based on Chapter 1 of the April 2023 World Economic Outlook: “A Rocky Recovery.”
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