The International Monetary Fund’s (IMF) latest World Economic Outlook (WEO) report finds that global growth is projected to fall from an estimated 3.5 percent in 2022 to 3 percent in both 2023 and 2024. While the forecast for 2023 is modestly higher than predicted in the April 2023 World Economic Outlook, it remains weak by historical standards.
“The global economy continues to gradually recover from the pandemic and Russia’s invasion of Ukraine. In the near term, the signs of progress are undeniable…Yet many challenges still cloud the horizon, and it is too early to celebrate,” said Pierre-Olivier Gourinchas, the Economic Counsellor and the Director of Research of the IMF.
The report finds that the rise in central bank policy rates to fight inflation continues to weigh on economic activity. Advanced economies continue to drive the decline in growth from 2022 to 2023, with weaker manufacturing, as well as idiosyncratic factors, offsetting stronger services activity, the IMF said.
In the emerging markets and developing economies, the growth outlook is broadly stable for 2023 and 2024, albeit with notable shifts across regions. On a year-over-year basis, global growth bottomed out in the fourth quarter of 2022. However, in some major economies, it is not expected to bottom out before the second half of 2023, said the IMF.
As a result, it expects world trade growth to decline from 5.2 percent in 2022 to 2 percent in 2023, before rising to 3.7 percent in 2024, well below the 2000-19 average of 4.9 percent.
“The decline in 2023 reflects not only the path of global demand but also shifts in its composition toward domestic services, lagged effects of US dollar appreciation — which slows trade owing to the widespread invoicing of products in US dollars — and rising trade barriers,” the report said.
For advanced economies, the growth slowdown projected for 2023 remains significant, from 2.7 percent in 2022 to 1.5 percent in 2023, with a 0.2 percentage point upward revision from the April 2023 WEO. About 93 percent of advanced economies are projected to have lower growth in 2023, and growth in 2024 among this group of economies is projected to remain at 1.4 percent. In the United States, growth is projected to slow from 2.1 percent in 2022 to 1.8 percent in 2023, then slow further to 1 percent in 2024.
For emerging markets and developing economies, growth is projected to be broadly stable at 4 percent in 2023 and 4.1 percent in 2024, with modest revisions of 0.1 percentage point for both 2023 and 2024, as per the report.
However, this stable average masks divergence, IMF said, with about 61 percent of the economies in this group growing faster in 2023 and the rest –– including low-income countries and three of the five geographic regions –– growing more slowly.
“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… It is critical to avoid easing rates prematurely, that is until underlying inflation shows clear and sustained signs of cooling. We are not there yet. All the while, central banks should continue to monitor the financial system and stand ready to use their other tools to maintain financial stability,” Pierre-Olivier Gourinchas said.
IMF on India
The latest WEO shows that the IMF estimates India’s real GDP growth at 6.1 percent in FY24, a 0.2 percentage point upward revision compared with its April projection. This, said the IMF, reflects momentum from stronger-than-expected growth in the fourth quarter of 2022 as a result of stronger domestic investment. India’s growth is seen slowing from an estimated 7.2 percent in FY23 to 6.1 percent in FY24 and then recovering gradually to 6.3 percent by FY25, as per IMF.
On a calendar year basis, India’s growth is seen at 6.6 percent in 2023 and 5.8 percent in 2024.
Global inflation
Global headline inflation is expected to fall from 8.7 percent in 2022 to 6.8 percent in 2023 and 5.2 percent in 2024, as per the report estimates, but remain above pre-pandemic (2017-19) levels of about 3.5 percent. About three-quarters of the world’s economies are expected to see lower annual average headline inflation in 2023, the report found.
Monetary policy tightening is expected to gradually dampen inflation, but a central driver of the disinflation projected for 2023 is declining international commodity prices, said the IMF.
Core inflation is generally declining more gradually. IMF estimates that globally, core inflation is set to decline from an annual average of 6.5 percent in 2022 to 6 percent in 2023 and 4.7 percent in 2024.
Risks to outlook
The balance of risks to global growth remains tilted downward, but adverse risks have receded since the publication of the April 2023 WEO, the IMF said. Inflation could remain high and even rise if further shocks occur, including those from an intensification of the war in Ukraine and extreme weather-related events, triggering a more restrictive monetary policy.
Financial sector turbulence could resume as markets adjust to further policy tightening by central banks. China’s recovery could slow down, in part as a result of unresolved real estate problems, with negative cross-border spillovers. Sovereign debt distress could spread to a wider group of economies. On the upside, inflation could fall faster than expected, reducing the need for tight monetary policy, and domestic demand could again prove more resilient.
