June 24, 2024

Global Economy Shows Signs of Resilience Despite Persistent Threats

The world economy is showing signs of resilience this year despite persistent inflation and a slow recovery in China, the International Monetary Fund said on Tuesday, raising the prospect of avoiding a global recession and unexpected crises.

Signs of hope in the IMF’s latest World Economic Outlook may give global policymakers further confidence that their efforts to contain inflation are on track without causing serious economic damage. Global growth, however, has been lackluster by historical standards, and the fund’s economists warned that serious risks remained.

“The global economy continues to gradually recover from the pandemic and the Russian invasion of Ukraine, but it is not out of the woods yet,” said Pierre-Olivier Gourinchas, the IMF’s chief economist at a news conference on Tuesday.

The IMF raised its forecast for global growth this year to 3 percent, from 2.8 percent in its April projection. It predicted that global inflation would ease from 8.7 percent in 2022 to 6.8 percent this year and 5.2 percent in 2024, as the effects of higher interest rates filtered out around the world.

The outlook was largely better because the financial markets – which had been hit by the collapse of several major banks in the United States and Europe – have largely stabilized. Another major financial risk was averted in June when Congress acted to raise the US government’s borrowing limit, ensuring the world’s largest economy would continue to pay its bills on time.

The new figures from the IMF come as the Federal Reserve is widely expected to raise interest rates by a quarter point at its meeting this week, keeping its future options open. The Fed has been raising rates aggressively to try to reduce inflation, raising them from near zero as late as March 2022 to a range of 5 percent to 5.25 percent today. Policymakers were trying to cool the economy without pushing it and rates were held steady in June to gauge how the US economy was absorbing the higher borrowing costs already approved by the Fed.

As countries such as the United States continue to grapple with inflation, the IMF has urged central banks to remain focused on restoring price stability and strengthening financial supervision.

“Inflation is expected to worsen, we have entered the final phase of the inflation cycle that started in 2021,” said Mr Gourinchas. “But hope is not a policy and the crash could be quite difficult to execute.”

He added: “It remains imperative to avoid easing monetary policy until core inflation shows clear signs of sustained cooling.”

Fed officials will release their July interest rate decision on Wednesday, followed by a news conference with Fed chairman Jerome H. Powell. Policymakers had previously predicted they could raise rates one more time in 2023 beyond the move expected this week. While investors are skeptical that they will ultimately make that final rate move, officials are likely to want to see more evidence that inflation is falling and the economy is cooling before committing in any direction.

The IMF said on Tuesday it expected growth in the United States to slow from 2.1 percent last year to 1.8 percent in 2023 and 1 percent in 2024. It expects consumption, which has remained strong, to begin to decline in the coming months as Americans draw down their savings and interest rates rise further.

Growth in the eurozone is expected to be just 0.9 percent this year, dragged down by contraction in Germany, the region’s largest economy, before picking up to 1.5 percent in 2024.

European policymakers are still struggling to slow inflation. On Thursday, the European Central Bank is expected to raise the interest rates of the 20 countries that use the euro currency to the highest level since 2000. But after a year of pushing interest rates up, policymakers at the central bank are trying to shift the focus from how high rates will go to how long they can stay at levels intended to curb the economy and end domestic inflationary pressures generated by increased wages or corporate profits.

Policymakers have raised rates because the economy has been somewhat more resilient than expected this year, supported by a strong labor market and lower energy prices. But the economic outlook remains relatively weak, and some analysts expect the European Central Bank to be close to halting interest rate hikes amid signs that its restrictive policy stance is weighing on economic growth. Monday, index of economic activity in the eurozone to an eight-month low in July, as the manufacturing industry contracted further and the services sector slowed.

Next week, the Bank of England is expected to raise interest rates for the 14th time in a row in an attempt to push down inflation in Britain, where prices in June rose 7.9 percent from a year earlier.

Britain has a number of prospects, including economists at the IMF, by avoiding a recession so far this year. But the country continues to face a challenging set of economic factors: Inflation is rising steadily in part because a tight labor market is putting pressure on wages, and households are increasingly concerned about the impact of high interest rates on their mortgages as repayment rates tend to reset every few years.

A weaker-than-expected recovery in China, the world’s second-largest economy, is also dependent on global output. The IMF pointed to a sharp contraction in China’s real estate sector, weak consumption and tepid consumer confidence as reasons for concern about China’s outlook.

Official figures released this month showed China’s economy slowed sharply in the spring from earlier in the year, as exports fell, real estate plunged, and some local governments were forced to cut debt on spending after running low on cash.

Mr Gourinchas said the steps taken by China to restore confidence in the property sector were a positive step and suggested that targeted support for households to boost confidence could boost consumption.

Despite reasons for optimism, the IMF report shows that the world economy is not in the clear.

Russia’s war in Ukraine continues to pose a threat that could push global food and energy prices higher, and the fund noted that the recently scrapped deal that allowed grain exports from Ukraine could go a long way. The IMF has predicted that grain prices could rise by as much as 15 percent as a result of the termination of the agreement.

“The war in Ukraine could intensify, further raising food, fuel and fertilizer prices,” the report said. “It is concerning that the Black Sea Grain Initiative has recently been suspended in this regard.”

He also reiterated his warning against allowing the war in Ukraine and other sources of geopolitical tension to take a further toll on the world economy.

“Such developments could contribute to further volatility in commodity prices and hinder multilateral cooperation in the provision of global public goods,” the IMF said.

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