IMF raises growth forecasts as China reopens and gas prices fall

Global growth has proven “surprisingly resilient” and most countries will avoid a recession this year, the IMF said, as it upgraded its forecasts and hailed a possible turning point for the world economy.

In estimates that took into account China’s decision to scrap its zero-Covid policy last month, the fund said it expected the global economy to grow 3.2 per cent between the end of the final quarter of 2022 and the end of the last quarter of this year.

That would mark a significant improvement on 2022, when the IMF estimates the global economy grew 1.9 per cent. The 3.2 per cent projected growth is also 0.5 percentage points higher than the IMF’s last forecast, in October.

Pierre-Olivier Gourinchas, IMF chief economist, said 2023 “could well represent a turning point”, with economic conditions improving in subsequent years.

“We are well away from any [sign of] global recession,” Gourinchas said, striking a sharp contrast with remarks by managing director Kristalina Georgieva this month that recession would hit more than a third of the global economy.

The IMF said its improved outlook reflected the opening up of the Chinese economy and falling energy prices for Europe.

Bar chart of 2023 economic growth forecast (YoY, Q4) showing India is expected to be the world’s fastest growing large economy

It forecast that on average, the global economy would be 2.9 per cent bigger in 2023 than in 2022 — a different basis of calculation than the comparisons of the fourth quarters of this and last year. That is a step down from the 3.4 per cent pace estimated for 2022.

But the IMF remained less optimistic than investors. With the MSCI World index of equities up 7 per cent since the start of the year and bond markets expecting interest rate cuts before 2024, traders have priced for a soft landing and pain-free reduction in inflation.

The fund expects the UK to be the only leading economy to shrink in 2023, with GDP forecast to be 0.5 per cent smaller in the fourth quarter of the year than in the same period of 2022. Even Russia’s economy is likely to outpace the UK’s, according to its estimates, growing 1 per cent over the same period.

Chinese growth, at 5.9 per cent, is forecast to be more than double the fund’s October estimate, while India is expected to be the world’s fastest-growing large economy this year, with output 7 per cent higher at the final quarter of 2023 than a year earlier. Together, China and India will account for half of global growth this year, while the US and euro area will account for just 10 per cent, the IMF said.

China will be an “engine” that benefits other countries, Gourinchas said.

Bar chart of Cumulative growth during 2022 and 2023 showing IMF outlook for the global economy has improved

The IMF warned, however, that it remained concerned about risks in China’s property sector. Beijing has been grappling with a real estate crisis since 2021, when developer Evergrande defaulted on its international debt.

By the end of the year, the US economy is expected to be 1 per cent larger than a year earlier, unchanged from October’s forecast. But the IMF says the country’s 2022 performance was stronger than expected.

Gourinchas said there was “a possibility” a US recession could be avoided but that this was a “narrow path”, adding that higher interest rates were “certainly going to cool off the economy and bring down inflation”.

The US Federal Reserve is expected to raise rates by a quarter point this week, setting a target range of between 4.5 per cent and 4.75 per cent.

Tobias Adrian, the director of the IMF’s monetary and capital markets department, warned that interest rates could rise more than markets expect and take longer to come down, particularly in the US.

“There’s certainly a wedge in between what policymakers are communicating and what’s priced into markets,” he said. “There is still a lot of upside risk to inflation . . . Until it is very clear that inflation is coming down in a durable fashion . . . it is still necessary to continue to tighten monetary policy.”

The IMF also reiterated concerns about debt defaults in emerging markets but downplayed the risk of a “systemic debt crisis environment”.

About 60 per cent of low-income countries and several emerging market economies are at risk of being or already are in distress, according to the fund.

Asked about the revival of bailout talks with Pakistan, which had its growth outlook downgraded 2.5 percentage points to 2 per cent for this year, the IMF said it would focus on restoring domestic and external sustainability during a mission to Islamabad this week.


Business Asia
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