The International Monetary Fund raises its forecasts but warns that the global economy will ‘not get out of the woods’

The International Monetary Fund

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The chief economist of the International Monetary Fund said the risks of a global economic collapse have receded, with the multilateral lender forecasting 3 percent growth this year.

In an interview with the Financial Times, Pierre-Olivier Gourinchas said the economic outlook has improved since the multilateral lender published its latest forecasts in April amid a bout of banking sector stress.

“Things are moving in the right direction,” he said, adding that the risk of global growth slipping to 2 percent or less is now lower as the more severe financial risks have receded.

The International Monetary Fund considers that the UK will now avoid a recession, buoyed by strong spending by consumers.

But Gorench warned that developed and emerging economies are not yet “out of danger,” because central banks’ efforts to mitigate stubbornly high inflation will continue to weigh on growth.

Tuesday’s forecast for global economic growth of 3 percent was 0.2 percentage point higher than the Fund predicted three months ago.

It comes after a stronger-than-expected first quarter, but is a step down from 3.5 percent last year and below historical averages.

Gorenchas said the prospects for a soft landing in the United States — where inflation drops without causing excessive job losses — have increased as price pressures have eased in recent months. The consumer price index is now running at an annual pace of 3 per cent.

The fund was less optimistic about Germany’s economic prospects, forecasting a contraction of 0.3 percent this year – down from a smaller 0.1 percent contraction in April, and maintained its call for the Chinese economy to grow by a modest 5.2 percent in 2023.

The debt crisis across developing economies remains a major concern although emerging countries generally remain “resilient” to the vagaries of financial markets.

Bar Chart Of Gdp Growth Forecasts In 2023 (%) Showing That The Imf Has Raised Its Forecast For Growth This Year

There are continuing concerns that despite sharp declines in headline rates, strong labor markets and strong consumer demand will make it difficult to fully root out inflation. This means that central banks will have to continue to tighten their monetary policy.

Gorynych expected little reprieve from the rate-setters, even as the era of “huge hikes” drew to a close.

“We’re nearing the peak of our hiking cycle, but we’re not quite there yet,” he said. “We will see central banks stick in place until they are confident enough that the economy is on the right track.”

Interest rate hikes by the US Federal Reserve, European Central Bank and Bank of England are expected in the coming days, and the International Monetary Fund on Tuesday urged rate-setters to avoid any “premature easing”.

Core measures of inflation, which exclude changes in food and energy costs, will return very slowly to the long-term targets of 2 per cent pursued by most monetary authorities.

In 2023, the Fund believes, on an annual average basis, about half of economies will not experience a decline in core inflation. For advanced economies, they raised their near-term estimates from April figures by 0.3 percent in 2023 and 0.4 percent in 2024 to 5.1 percent and 3.1 percent, respectively.

Inflation is set to remain above target in 89 percent of economies with such thresholds in the coming year.

The added risk is another outbreak in the financial markets that forces the authorities to intervene.

If central banks keep interest rates higher for longer than investors currently expect, “you may have at some point the market realizes that.” [its expectations of borrowing costs are] Gorenchas said.

For now, markets expect central banks like the Fed to start cutting interest rates early this year. If those bets prove to be incorrect, “it could lead to some re-quotes and then you can have a chain of events that creates some volatility.”

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