The global economy is on the right track, but it is not out of the woods yet and victory cannot be claimed. This consideration corresponds to Pierre-Olivier Gourinchas, economic adviser and director of the research department of the International Monetary Fund (IMF), and is part of his commentary on the updated report on the outlook for the global economy, published this Tuesday in Washington.
The outlook is better for Spain, whose growth is revised up one point, to 2.5%, and becomes the fastest growing in its environment.
The outlook is a bit brighter. Although it remains weak, inclined to the downside, although the adverse risks have moderated. Inflation is still the priority point, along with disinflation efforts with interest rate rises, which in turn cause a slowdown with disparate effects.
According to this document, world growth decreases from the estimated 3.5% for 2022 to 3% in 2023 and 2024. However, the forecast for this year is somewhat higher than that forecast in the April edition, with an increase of two tenths in comparison, while that of 2024 remains the same.
Despite this improvement for 2023, forecasts for the world economy remain weak from a historical perspective and are below the annual average (2000-2019) which stands at 3.8%. The slowdown is concentrated in advanced economies, which fell from 2.7% in 2022 to a perspective of 1.5% and remains at 1.4% in 2024.
The IMF argues that this brake is due to the weakening of manufacturing, which offsets the greater dynamism in the services sector. The growth of the euro zone falls from 3.5% in 2022 to 0.9% in 2023, with a rebound to 1.5% in 2024. The greater strength of services and tourism allows Spain to increase its growth by one point in 2023, up to 2.5%, the country that rises the most among its surroundings, which means that it remains at the forefront in terms of improvement.
If this circumstance also benefits Italy (increase of four tenths to stand at 1.1%), Germany is the opposite extreme due to the weakness of the manufacturing product and the economic contraction in the first quarter of 2023. This has led to a downward revision of its growth by 0.2 percentage points, which leaves it with a negative projection of 0.3%, which goes up to 1.3% in 2024.
US growth falls this year to 1.8% compared to 2.1% in 2022, although this forecast means an upward revision of two tenths compared to last spring's report.
The document stresses that the rise in central bank rates to combat inflation continues to weigh down economic activity. In this forecast, world inflation is expected to drop from 8.7% in 2022 to 6.8% this year (two tenths less than in April) and 5.2% in 2024 (three tenths higher).
Core inflation (excluding more volatile prices such as food and energy) is more entrenched, above central bank targets, and declining more gradually. It is predicted that it will drop from 6.5% in 2022, to 6% in 2023 (three tenths higher compared to April) and to 4.7% next year (four tenths more).
“It is clear that the battle against inflation has not yet been won,” says Gourinchas. "Hopefully, with inflation beginning to recede, we have entered the final stage of the inflationary cycle that began in 2021. But hope is not a policy and the final objective can be quite difficult to execute," underlines the Fund's chief economist.
The big objective, according to the report, is to defeat inflation. Therefore, the IMF recommends that central banks, where the underlying indicator of prices is high and persistent, continue with their commitment to reduce inflation, which is understood as a perseveration in raising interest rates. "In view of the uncertainties, economic policy must be adjusted based on the data and avoid premature easing, before price pressures have duly moderated, and tools to preserve financial stability must continue to be used when necessary," the document notes.
“While central banks are primarily responsible for restoring price stability, public spending cuts and tax increases through laws to ensure public debt sustainability can further reduce inflation by moderating aggregate demand and bolstering the overall credibility of disinflation strategies. This is especially true in the case of countries with overheated economies and facing difficult trade-offs between inflation and employment”, he insists.
The rapid rate of tightening of monetary policy, he warns, continues to put pressure on the financial system, for which reason he recommends strengthening supervision and monitoring risks to anticipate episodes of tension in the banking sector. In this sense, he acknowledges that the industry has been able to stabilize after the crisis that occurred last March with the intervention of three entities in the US.
It also points out that inflation risk is now more balanced and most large economies are less likely to need further huge increases in interest rates. He qualifies, however, that it is critical to avoid easing rates prematurely and this should not be done until core inflation shows clear and sustained signs of cooling.
It hasn't gotten there yet, he remarks. So central banks need to continue to monitor the financial system and be prepared to use other tools to maintain financial stability.
Furthermore, after years of strong fiscal support in many countries, it is time to gradually restore more restrictive policy. This will protect stability and lend credibility to the disinflation strategy. “This is not a call for austerity,” Gourinchas clarifies. “The pace and composition of this fiscal consolidation must take into account the strength of private demand and the protection of the most vulnerable”, he specifies.
The report reiterates that, in most economies, the priority continues to be achieving sustained disinflation while ensuring financial stability. So "central banks should keep their attention focused on restoring price stability and strengthening financial supervision and risk surveillance."
Should market tensions materialize, countries should provide liquidity without delay. They should also build fiscal buffers, and make sure that the composition of the fiscal adjustment directs support towards the least advantaged. Improving the supply side of the economy would facilitate fiscal consolidation and encourage a smoother decline in inflation toward the established targets.
