December 18th, 2024
The International Monetary Fund (IMF) reports that early 2023 hopes of a soft landing for the world economy have faded due to persistently high inflation and recent financial sector unrest. Although inflation has seen a decrease as central banks increased interest rates and food and energy prices dropped, underlying price pressures remain resilient, with labor markets in several economies remaining tight.
Financial sector troubles and geopolitical tensions
The IMF highlights that side effects from the rapid rise in policy rates are becoming visible, with vulnerabilities in the banking sector and increased fears of contagion across the broader financial sector, including nonbank financial institutions. In response, policymakers have taken assertive actions to stabilize the banking system.
The war in Ukraine, high geopolitical tensions, and high debt levels continue to shape the world economy in 2023. Despite some positive developments, such as lower food and energy prices and improved supply-chain functioning, risks remain tilted to the downside due to increased uncertainty from recent financial sector turmoil.
Baseline forecast predicts slow growth
Assuming that recent financial sector stresses are contained, the IMF's baseline forecast predicts a decline in growth from 3.4% in 2022 to 2.8% in 2023, with a slow rise to 3.0% in five years. Advanced economies are anticipated to experience a significant growth slowdown, from 2.7% in 2022 to 1.3% in 2023.
In an alternative scenario with further financial sector stress, global growth could decline to approximately 2.5% in 2023, the weakest growth since the 2001 global downturn, excluding the initial COVID-19 crisis in 2020 and the global financial crisis in 2009. Advanced economy growth could fall below 1%.
Policy challenges and downside risks
The IMF report states that the weak outlook reflects tight policy stances needed to tackle inflation, recent deterioration in financial conditions, the ongoing war in Ukraine, and increasing geoeconomic fragmentation. Global headline inflation is expected to fall from 8.7% in 2022 to 7.0% in 2023, while core inflation is likely to decline more slowly.
The risks to the outlook are predominantly skewed to the downside, with the chances of a hard landing having risen significantly. Policymakers face a narrow path to improve prospects and minimize risks. Central banks must maintain a steady anti-inflation stance, while fiscal policymakers should support monetary and financial policymakers' actions in bringing inflation back to target and maintaining financial stability.