IMF keeps 2023 global growth outlook unchanged as regions diverge

The IMF on Tuesday left its top-line global growth forecast for 2023 unchanged, despite significant underlying differences between regions, while lifting its inflation outlook for the next couple of years.

The updated World Economic Outlook (WEO) report, released as the International Monetary Fund holds its annual meetings in Marrakesh, maintains a global growth estimate of 3.0 percent for this year while cutting the 2024 assessment to 2.9 percent, down 0.1 percent from the previous forecast in July.

Inflation, which has fallen sharply since last year, is predicted to remain elevated at 6.9 percent this year, up slightly from July, and 5.8 percent in 2024, up 0.6 percentage points.

Higher inflation could force central banks to keep interest rates higher for longer, which would likely have a knock-on effect for global growth.

The global economy has shown "remarkable" resilience as it continues to recover from the Covid-19 pandemic, Russia's invasion of Ukraine, and the cost-of-living crisis, the IMF said in the WEO.

However, the report also noted that "growth remains slow and uneven, with growing global divergences."

"The global economy is limping along, not sprinting," it warned.

- US and Europe diverge -

Among advanced economies, the divergence in economic outlook between Europe and the United States is predicted to grow further in the coming years.

The US economy is now forecast to grow by 2.1 percent this year, up 0.3 percentage points, and by 1.5 percent next year, up half a percentage point.

Meanwhile, the Euro area is forecast to grow by just 0.7 percent this year, down 0.2 percentage points from July, and by a reduced 1.2 percent in 2024.

The reasons for the divergence across the Atlantic are fourfold, according to IMF Chief Economist Pierre-Olivier Gourinchas, but the primary reason is the enduring impact of the war in Ukraine on energy prices.

Unlike Europe, the United States is a net energy exporter, "so when the price of energy goes up, if anything, they become richer," he told AFP in an interview ahead of the publication of the WEO.

He also pointed to more resilient US consumer spending, less impact from interest rate hikes due to a higher prevalence of longer-term mortgages, and more generous pandemic-related fiscal support than in Europe.

Among Europe's economies, Germany's outlook has worsened since July, leaving it as the only country in the G7 group of advanced economies that is expected to enter a recession this year or next.

Meanwhile, the IMF sharply raised Japan's economic outlook to 2.0 percent for this year, pointing to "pent-up demand, a surge in inbound tourism, and accommodative policies, as well as by a rebound in auto exports."

- China slows, India advances -

The picture is also mixed among emerging market and developing economies.

The IMF downgraded its growth forecast for China's economic growth for the next two years, saying lower investment due to the country's real estate troubles was the "main contributor."

The IMF now expects the world's second-largest economy to grow by 5.0 percent this year, and 4.2 percent in 2024, down 0.2 and 0.3 percentage points, respectively.

Gourinchas told AFP that China's below-trend growth forecast requires "very forceful, and very sizable action by the government to really bring back confidence in the sector."

The IMF expects China's neighbor India to fare far better, lifting its growth forecast for this year to 6.3 percent, in line with its unchanged outlook for 2024.

The growth outlook for this year for the Middle East and Central Asia was cut by half a percentage point to 2.0 percent, dragged down by a sharp reduction in the growth forecast for oil-rich Saudi Arabia.

And in Sub-Saharan Africa, the outlook has worsened slightly, with growth expected to reach 3.3 percent, down 0.2 percentage points amid a projected slowdown in the Nigerian economy.

- Russian economy remains resilient -

Russia's economy has remained more resilient than many economists expected since its invasion of Ukraine began in February last year.

The IMF sharply raised its economic growth forecast once more to 2.2 percent for this year, up 0.7 percentage points from July. Its growth outlook for next year was cut slightly to 1.1 percent.

The IMF said this was the result of a "substantial fiscal stimulus, strong investment, and resilient consumption in the context of a tight labor market."

Russia's fiscal deficit is expected to grow to 3.7 percent this year, up sharply from 2022 but significantly lower than its July forecast, according to an IMF spokesperson.

This was "in part thanks to recent windfall taxes and higher oil and gas revenues due to the ruble depreciation," they said in a statement shared with AFP.

US outpaces Europe while China struggles: IMF

The global economy remains resilient despite a series of challenges, but some countries are growing faster than others, with China showing signs of a slowdown, the IMF's chief economist told AFP.

Pierre-Olivier Gourinchas spoke to AFP ahead of Tuesday's release of the International Monetary Fund's World Economic Outlook in Marrakesh, Morocco.

This interview has been edited for length and clarity.

- Why is the United States performing better than Europe? -

There are a number of things. The most important one by far is ... the Russian invasion of Ukraine, the disruption in energy markets. Europe is importing energy, so when it has to pay a higher energy bill, it's basically sending a check somewhere else and so the region becomes poorer. The US is not an energy importer, so when the price of energy goes up, if anything, they become richer. So there's a big difference right there.

The second difference, I would say, is probably coming from the fact that we've seen US consumers being very resilient and, well, how do they do that? Well, they've been dipping into the savings. In many advanced economies, there was a buildup of what we call excess savings during the pandemic. In Europe, by and large, households have not started dipping into that.

Factor number three, I would say, there might be some difference in the transmission of monetary policy. So both in the euro area and the US, we've seen his massive tightening of monetary policy (by central banks). In the US you have a lot of long-term, fixed-rate mortgages in the housing market. People borrow 30 years and they lock in the rate at the time at which they bought, so (if) you borrowed three years ago at a rate of two percent, let's say rates can be now seven percent, it doesn't affect you.

Finally, there is a question of how much fiscal policy might be doing. What we're seeing in the euro area is (that) a lot of support was put in place during the pandemic and during the energy crisis. The energy prices have been coming down, the pandemic is behind us, so a lot of that support is being withdrawn. In the US, the deficits are still very large.

- The IMF forecasts a 0.5 percent contraction in Germany this year. Is there a long-term concern? -

In the case of Germany there is a combination of two very powerful forces right now. One we've already mentioned when we talked about the difference between the euro area and the US, which is the energy shock, and in the context of an economy that was very dependent on the manufacturing industries -- very energy intensive and dependent on energy supplies from Russia. So that has been a big shock for the German economy.

But then you have the tightening of monetary policy and on top of that in an inflation context, the loss of purchasing power, the cost-of-living crisis. So all of these things together, explain, we have relatively weak manufacturing, we have relatively weak consumption, we have relatively weak investment.

I think this is an economy that has a lot of resources. It has fiscal space. It has the ability to adapt. It has tremendous industries and technology, it has skilled labour, so this is this is not necessarily something that is a concern.

- You have lowered China's growth outlook due to a real estate crisis. Does the government need to do more to prevent a worsening situation? -

It's obviously an important factor behind our revised estimate for 2023. This has the potential, if it's not addressed, to weigh on Chinese economic activity even more. It's a very substantial component of aggregate activity in China. You could have then worries about the financial health for the banks that are making loans to the developers who are right now sitting on a number of properties that they cannot sell, or cannot complete and deliver the units that they have already pre-sold because they're facing liquidity problems. So that could then spread more broadly into the Chinese economy. You could have problems for local authorities because they generate quite a bit of their revenues from land sales.

This is already a real estate crisis, but it could become something even bigger. So that requires, in our view, very forceful, and very sizable action by the government to really bring back confidence in the sector, to guarantee financial stability to resolve and take care of the developers facing financial difficulties. And until that is done, then, you know, at that point, maybe the sector would be able to rebound, but that will require quite a bit of adjustment.