Global Economy to Grow but Inflation Threat Persists, IMF Warns

The International Monetary Fund (IMF) has lifted its global economic growth prediction for the year, citing a rise of 3%, but warns of the potential for more interest rate hikes and sustained inflation that could curtail this growth.

Key Points:

• The IMF raises its global economic growth outlook to 3% for this year and next.
• The US growth forecast for the year is upgraded due to resilient consumer spending and a strong job market.
• Concerns persist over higher inflation and potential interest rate hikes which may dampen growth.
• Global growth is expected to be slower this year as central banks continue to raise interest rates to control inflation.

IMF’s Revised Economic Outlook

In its latest World Economic Outlook report, the IMF foresees global economic growth of 3% for this year and the next, a slight 0.2% point increase for 2023 compared to the previous forecast made in April. Despite this, the growth rate is considered more sluggish than usual, down from 3.5% last year and falling short of the historical average of 3.8%.

The US, a key driver of the global economy, sees its growth projected to decline to 1.8% this year, down from 2.1% in 2022, and further drop to 1% in 2024. Nonetheless, the forecast for this year was revised upward by 0.2%, attributing to resilient consumer spending in the first quarter and a robust job market.

Inflation Concerns and Rate Hikes

As IMF Chief Economist Pierre-Olivier Gourinchas warned, the balance of risks is “tilted downward” for global economies, even with COVID-19 no longer being viewed as a global health emergency and supply chains substantially recovered. The slower global growth is primarily associated with central banks worldwide continuing to hike interest rates to curb inflation. The Federal Reserve, for instance, is almost certain to raise interest rates in the US by another 0.25% this week.

Gourinchas noted that inflation could remain high or potentially increase due to factors like Russia’s ongoing conflict in Ukraine or extreme weather events. This could necessitate further tightening of monetary policy, sparking another round of financial market volatility.

Global Inflation and Core Inflation

The IMF anticipates global inflation to drop to 6.8% this year and 5.2% next year, down from 8.7% in 2022. However, when excluding unstable energy and food prices, core inflation seems to be more persistent than expected, particularly in advanced economies.

Forecasts for these economies have been revised upward by 0.3 percentage point for 2023 and by 0.4 percentage point for 2024. Depending on the country, core inflation has remained high due to elevated energy and food prices, high corporate profits, and robust job markets coupled with strong wage growth.

While the prospects of higher inflation persist, the global growth is expected to be sluggish this year as growth in advanced economies slows down significantly, from 2.7% last year to just 1.5% this year.