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The IMF's improved economic outlook won't change the plans of central banks

Amid China’s reopening, India's growth, and the US's resilience, inflation pressures persist
Monetary policy should still be on a tight leash.
Monetary policy should still be on a tight leash.
Photo: Matt Cardy / Stringer (Getty Images)
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The world economy is faring slightly better than expected.

Of course, global growth is projected to fall to 2.9% in 2023, down from a 3.4% expansion in 2022, according to fresh projections by the International Monetary Fund (IMF). But that’s still 0.2 percentage points higher than predicted in the IMF’s outlook last October.

Even as the fight against inflation and Russia’s war in Ukraine strain the economy, Pierre-Olivier Gourinchas, the IMF’s director of research, sees a “turning point, with growth bottoming out and inflation declining,” he said in a blog post yesterday (Jan. 30).

The IMF’s latest World Economic Outlook predicts that global growth will rebound to 3.1% in 2024.

The global economy is “surprisingly resilient

“Economic growth proved surprisingly resilient in the third quarter of last year, with strong labor markets, robust household consumption and business investment, and better-than-expected adaptation to the energy crisis in Europe. Inflation, too, showed improvement, with overall measures now decreasing in most countries—even if core inflation, which excludes more volatile energy and food prices, has yet to peak in many countries.”

Pierre-Olivier Gourinchas, director of research at the IMF

How will the global economy recover in 2023?

According to Gourinchas:

🇨🇳 China’s re-opening “will pave the way for a rapid rebound in activity,” provided no more covid waves wreak havoc.

💵 A weakening of the US dollar from its November high will offer some respite, especially for emerging economies.

🇮🇳 India, along with China, will account for half of global growth this year, versus just a tenth for the US and euro area combined. India’s economy is poised to grow 6.1% in 2023.

📝 Fiscal support should be better targeted at those most affected by elevated food and energy prices, and broad-based fiscal reliefs that are costly and unsustainable should be withdrawn.

🤲 Stronger multilateral cooperation is required to fight growing geoeconomic fragmentation when it comes to international trade, climate change, public health preparedness, and more.

🏭 Supply-side policies that help “remove key growth constraints, improve resilience, ease price pressures, and foster the green transition.”

Charted: The UK will fare the worst among G7 economies

Central banks must keep fighting inflation

Global inflation is expected to fall to 6.6% in 2023 and further to 4.3% the following year—but it will still remain above pre-pandemic levels. That calls for anti-inflation measures to continue, the IMF recommends.

“Where inflation pressures remain too elevated, central banks need to raise real policy rates above the neutral rate and keep them there until underlying inflation is on a decisive declining path,” Gourinchas wrote. “Easing too early risks undoing all the gains achieved so far.” And that, of course, means more interest rate hikes.

Calendar: All eyes on the Fed and the ECB

Feb. 1: The Fed is expected to raise interest rates for the eight straight time, but by 25 basis points, which won’t be as jarring as earlier hikes.

Feb. 2: The European Central Bank (ECB) is expected to announce a 50-basis-point hike at its meeting.

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