Resilient Global Economy Still Limping Along, With Growing Divergences
IMF Blog, October 10, 2023
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- Authors: Pierre-Olivier Gourinchas
- Published: October 10, 2023
Global outlook and growth projections
- World economic growth is projected to slow from 3.5 percent in 2022 to 3 percent in 2023 and 2.9 percent in 2024, a 0.1 percentage point downgrade for 2024 from July.
- Growth remains well below the historical average.
- The likelihood of a soft landing has increased: projections are increasingly consistent with bringing inflation down without a major downturn in activity.
- Advanced economies are experiencing a more pronounced slowdown than emerging market and developing counterparts.
- The United States growth outlook was revised up due to resilient consumption and investment.
- Euro area activity was revised downward.
- Many emerging market economies proved unexpectedly resilient, with the notable exception of China.
Inflation, labor markets, and sectoral forces
- Headline inflation path:
- 9.2 percent in 2022 (year-over-year basis)
- 5.9 percent in 2023
- 4.8 percent in 2024
- Core inflation (excluding food and energy) is projected to decline more gradually, to 4.5 percent in 2024.
- Most countries are not likely to return inflation to target until 2025.
- Labor markets in advanced economies remain buoyant with historically low unemployment rates supporting activity.
- U.S. unemployment forecast: modest increase from 3.6 percent to 3.9 percent by 2025.
- Real wages are catching up; little evidence of a wage-price spiral.
- Three forces shaping the outlook:
- The recovery in services is almost complete and demand supporting services-oriented economies is softening.
- Tighter credit conditions are weighing on housing markets, investment, and activity—more so in countries with a higher share of adjustable-rate mortgages or lower willingness/ability of households to draw down savings.
- Firm bankruptcies are increasing in some economies, although from historically low levels.
- Countries are at different points in their hiking cycle: advanced economies (except Japan) are near the peak; some emerging markets that started earlier (e.g., Brazil and Chile) have already started easing.
- Last year’s commodity price shock shaped inflation and activity:
- Economies heavily dependent on Russian energy imports saw a steeper increase in energy prices and a sharper slowdown.
- The passthrough from higher energy prices played a large role in driving core inflation higher in the euro area—unlike the United States, where core inflation pressures reflect a tight labor market.
Key risks and vulnerabilities
- Overall balance of risks remains tilted to the downside despite moderation of some extreme risks such as severe banking instability since April.
- China’s real-estate crisis risks:
- Could intensify and pose a complex policy challenge.
- Restoring confidence requires promptly restructuring struggling property developers, preserving financial stability, and addressing strains in local public finance.
- Rapid declines in real estate prices could worsen bank and household balance sheets, risking serious financial amplification.
- Artificially supporting real estate prices would crowd out other investment, reduce new construction, and hurt local government revenues through reduced land sales.
- China’s economy must pivot away from growth that relies on credit for the real estate sector.
- Commodity price volatility risks from climate and geopolitical shocks could derail disinflation:
- Between June and late September, oil prices increased by about 25 percent amid extended supply cuts by OPEC Plus, before falling back by about 11 percent.
- Food prices remain elevated and could be further disrupted by an escalation of the war in Ukraine, harming many low-income countries.
- Geoeconomic fragmentation has increased dispersion in commodity prices across regions, including critical minerals, posing macroeconomic risks and risks to the climate transition.
- Inflation expectations and fiscal risks:
- Near-term inflation expectations have risen markedly above target, though they now appear to be turning a corner.
- Fiscal buffers have eroded in many countries: elevated debt levels, rising funding costs, slowing growth, and increasing mismatch between demands on the state and available fiscal resources.
- Financial conditions have eased in many countries despite tighter monetary policy, raising the danger of a sharp repricing of risk that could strengthen the U.S. dollar, trigger capital outflows, and increase borrowing costs and debt distress—especially for emerging markets.
Policy priorities and recommendations
- Monetary policy:
- Under the baseline, inflation recedes as central banks maintain a tight stance and avoid easing prematurely.
- Once disinflation is firmly established, with decreasing near-term inflation expectations and inflation targets coming into sight, gradually cutting the policy rate will be appropriate while maintaining a commitment to price stability.
- Fiscal policy:
- Fiscal policy needs to rebuild buffers, including by removing energy subsidies, while still protecting the vulnerable.
- Rebuilding buffers will also aid disinflation.
- The substantial widening of the fiscal deficit in the United States is highlighted as particularly worrying; fiscal policy should not be pro-cyclical at this stage of the inflation cycle.
- Structural reforms and medium-term focus:
- Return focus to the dimming medium-term outlook: global growth prospects are weak, especially for emerging market and developing economies, with implications for convergence, fiscal space, debt vulnerabilities, and scarring from the pandemic and the war.
- Structural reforms are key to higher long-term growth; sequence reforms carefully:
- Start with reforms focused on governance, business regulation, and the external sector (first-generation reforms) to unlock growth and make subsequent reforms—whether to credit markets or for the green transition—more effective.
- Multilateral cooperation:
- Avoid policies that contravene World Trade Organization rules and distort international commerce.
- Safeguard flows of critical minerals and agricultural commodities; establish “green corridors” to reduce volatility and accelerate the green transition.
- Prevent geoeconomic fragmentation that impedes shared prosperity and work to restore trust in rules-based multilateral frameworks that enhance transparency and policy certainty.
- Maintain a robust global financial safety net with a well-resourced IMF at its center.
Source: IMF blog post by Pierre-Olivier Gourinchas, October 10, 2023.