IMF upgrades forecasts for the global economy
Add Axios as your preferred source to
see more of our stories on Google.
Illustration: Sarah Grillo/Axios
Gone are last year's bleak warnings that the global economy is headed for a sharp slowdown. While caution still remains, there is renewed hope that inflation will keep retreating as growth proves more resilient.
Driving the news: That is the view from the International Monetary Fund's latest outlook for the global economy in the years ahead, released on Tuesday, which projects global growth will be 3% this year — 0.2 percentage points higher than they anticipated in April, but slower than last year's 3.5% global growth.
Why it matters: Central banks worldwide are still fighting inflation, which is weighing on economic activity, though to a lesser extent than forecasters anticipated. The global economy has withstood a slew of other risks, including banking sector turbulence, fallout from Russia's invasion of Ukraine and more.
- But price pressures remain the biggest threat, and they're proving harder to conquer.
What they're saying: "Hopefully, with inflation starting to recede, we have entered the final stage of the inflationary cycle that started in 2021," IMF chief economist Pierre-Olivier Gourinchas wrote in a blog post titled "Global Economy on Track but Not Yet Out of the Woods."
- "But hope is not a policy, and the touchdown may prove quite tricky to execute."
Details: The IMF sees a more pessimistic path for underlying inflation around the globe that underscores the stickiness as it shows early signs of becoming less so.
- Core inflation, which excludes food and energy prices, is estimated to be 4.7% next year, 0.4 percentage points higher than expected in April.
- Meanwhile, core inflation in the U.S., Europe and other advanced economies will remain sticky. The IMF expects the measure to hold at a 5.1% annual average rate in 2023, before declining to 3.1% next year.
Where it stands: "Monetary policy is already taking a chunk out of economic activity," Gourinchas said at a press conference.
- "We're seeing the increase in interest payments, we're seeing the contraction in lending, we're seeing signs of the economy cooling off — that's going to help bring down underlying inflation pressures."
The big picture: Labor market developments will determine how quickly inflation can recede. The IMF expects real wages will recover years of lost ground — a welcome development, but one that hints at inflation becoming more embedded in the economy.
- "Because average firms’ profit margins have grown robustly in the last two years, I remain confident that there is room to accommodate the rebound in real wages without triggering a wage-price spiral," Gourinchas wrote in the blog.
- "With inflation expectations well-anchored in major economies, and the economy slowing, market pressures should help contain the pass-through from labor costs to prices."
The bottom line: "Risks to inflation are now more balanced and most major economies are less likely to need additional outsized increases in policy rates," Gourinchas added.
