The International Monetary Fund said Tuesday that the global economy is limping but still well below pre-pandemic projections. The Fund cut its growth forecast for China and the euro area but left the U.S. outlook unchanged. IMF chief economist Pierre-Olivier Gourinchas addressed reporters ahead of the annual meetings of the IMF and World Bank, taking place this week in Marrakech, Morocco.
He noted that “many of the headwinds” from a resurgent global economy have dissipated since its spring meeting, with supply chains largely back to normal and financial conditions improving after authorities in the U.S. and Switzerland took steps to contain turbulence. However, the IMF said that several new risks remain.
Among them, the IMF said, is a sudden rise in inflation that would prompt central banks to raise interest rates further and lead to tighter credit and financial conditions for banks and nonbank institutions, particularly those with significant exposures to commercial real estate. Another risk is further fragmentation of the global economy because of Russia’s war in Ukraine and other geopolitical tensions, which could result in more restrictive trade policies and reduced economic activity.
In a significant update of its quarterly World Economic Outlook, the IMF said that while the U.S. economy has shown remarkable resilience to high energy prices and tightening monetary policy, the global recovery remains uneven. It said the world’s major economies still need to catch up to their pre-pandemic projections and will face challenges in 2023 and beyond. The IMF raised its growth forecast for the United States, citing robust business investment and consumer spending. However, it lowered its China estimate to 5.0 percent this year and 4.2 percent next, reflecting a slump in property-related activity.
While the IMF said overall global growth remained low and uneven, it also noted signs of a rebound in emerging markets and developing countries, helped by lower oil prices and resilient demand for commodities. It said that in the euro area, growth was expected to slow because of the impact of rising interest rates on housing and bank lending. However, it added that a more modest decline than initially feared could occur as the effect of recent shocks fades.
In China, the IMF warned that “forceful action” is needed to clean up the real estate sector and said authorities have started taking steps in this direction, but more needs to be done. It also cautioned that the slowdown in China could lead to more restrictions on trade. IMF economists warned that a slowdown in the world’s biggest exporter could lead to increased volatility for the rest of the globe and urged policymakers to rebuild fiscal buffers. The IMF also urged governments to avoid prematurely lifting stimulus measures, which could be “counterproductive” and lead to overheating. It said that monetary policy should stay tight until inflation is entirely under control and fiscal deficits are contained. The IMF also urged countries to ensure that their labor market reforms continue, especially for poorer countries, which should be careful about raising wages.
