IMF upgrades forecasts but warns global economy ‘not out of crisis’

Receive FREE Global Economic Development Updates

we will send you one myFT Daily Digest Latest Email Rounding global economic development News every morning.

The IMF’s chief economist said the risk of a crash landing of the global economy has waned as the multilateral lender predicted growth of 3 per cent this year.

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

“Things are moving in the right direction,” he said, adding that now the risk of global growth slipping to 2 per cent or below is low, as the most serious financial risks have abated.

The IMF believes Britain will now avoid recession on strong spending by consumers.

But Gourinchas cautioned that advanced and emerging economies are not “still out of trouble”, as central banks’ efforts to control hyperinflation will still weigh heavily on growth.

Tuesday’s forecast of 3 percent growth for the global economy is 0.2 percentage points higher than the fund predicted three months ago.

That’s a stronger-than-expected first quarter, but a step down from last year’s 3.5 percent and below the historical average. The IMF expects growth to remain weak over the next five years – partly due to poor gains in productivity.

Gourinchas said the prospect of a soft landing in the US — in which inflation eases without excessive job losses — has increased as price pressures eased in recent months. The Consumer Price Index is now running at an annual pace of 3 per cent.

The Fund was less optimistic on Germany’s economic prospects, forecasting a 0.3 percent contraction this year – down from a smaller contraction of 0.1 percent in April, and continued its call that China’s economy would grow at a modest 5.2 percent in 2023.

The debt crisis remains a top concern in developing economies, despite emerging economies remaining “resilient” to financial market volatility.

One fear is that even with a sharp drop in key rates, a strong labor market and strong consumer demand will make it difficult to eliminate inflation entirely. This would mean that central banks would have to keep tightening the screws on their monetary policy.

Goryuchas also said in a press briefing on Tuesday that the breakdown of a UN-brokered deal to export Ukrainian grain across the Black Sea is likely to put “upward pressure” on global food prices.

Ukraine is one of the world’s biggest grain exporters, but a wartime deal with Russia to continue exports fell apart earlier this month after Moscow backed out.

Overall, Gourinchas expected little respite from rate-setters, even as the era of “big hikes” drew to a close.

“We are nearing the peak of the hiking cycle, but we are not quite there yet,” he told the FT. “We will see central banks stay put until they are convinced that the economy is on the right track.”

Further rate hikes are expected from the US Federal Reserve, the European Central Bank and the Bank of England in the coming days, and the IMF on Tuesday urged rate-setters to avoid any “premature easing”.

Core inflation measures, which strip out changes in food and energy costs, will return very slowly to most monetary authorities’ long-standing target of 2 percent.

The Fund estimates that core inflation will not decline in about half of the economies in 2023 on an annual average basis. For advanced economies, it raised its near-term projections for growth by 0.3 percentage points in 2023 and 0.4 percentage points in 2024 to 5.1 percent and 3.1 percent, respectively, compared with the April data.

Inflation in 89 percent of economies with such a range is set to remain above the target next year.

An additional risk is another flare-up in financial markets that forces authorities to step in.

If central banks hold interest rates longer than investors currently expect, “you may at some point see the market realize that (its expectations of borrowing costs) are a little bit wrong”, Gourinchas said.

Currently, the market expects central banks like the Fed to start cutting rates by the end of this year. If those bets turn out to be wrong, “that would lead to some revaluation and then you could get a chain of events that creates some volatility”.