In 2023, the global economy will be slightly better than expected. But the industrialized countries in particular are still facing a period of very low growth. This is evident from new, interim forecasts from the International Monetary Fund (IMF) that were released in the night from Monday to Tuesday.
While at the end of last year it was still thought that the IMF would further reduce its expectations, the mood about the economy worldwide has actually improved slightly. The negative atmosphere was emphasized around the turn of the year by IMF director Kristalina Georgieva, who called 2023 a “difficult year”. Also, the IMF already wrapped its forecasts from last October with a lot of downside risks.
At 3.1 percent, global economic growth in 2024 = barely higher than this year
That turns out to be somewhat okay. The expected global economic growth this year is 2.9 percent, which is 0.2 percentage point more than previously thought. That does not mean that the pain of rising global inflation is over: global inflation averaged 8.8 percent in 2022, falling to 6.6 percent this year to reach 4.3 percent in 2024. That is still higher than the average 3.5 percent in the years before the pandemic. The IMF points out that the dampening effect of the interest rate hikes implemented by central banks will only become apparent after some time. Global economic growth in 2024, at 3.1 percent, is therefore barely higher than this year.
This is especially true for the rich industrial countries. Their economy will grow by an average of 1.2 percent in 2023 and 1.4 percent in 2024. These are meager figures.
Little windfall
Nevertheless, the forecasts for this year remain a small windfall compared to previous doomsday scenarios. The United States can count on an economic growth of 1.4 percent, 0.4 percentage point more than the forecast of October last year. This upgrade also applies to Germany, which on Monday reported a surprising contraction of 0.2 percent over the fourth quarter of 2022. The German economy is now expected not to shrink in 2023, but to grow narrowly, by 0.1 percent.
Conversely, the United Kingdom, which formally left the EU three years ago today, must count on a contraction of 0.6 percent, where growth of 0.3 percent was previously expected. Other notable adjustments are for China (plus 0.8 percent to a growth of 5.2 percent), which abruptly abandoned strict Covid policies at the end of last year, and Russia, where growth increased by no less than 2.6 percentage points, which leads to a growth of 0.3 percent compared to a previously expected sharp economic contraction.
The IMF warns that the financial markets are currently anticipating a further fall in inflation. As a result, investors’ expectations about future interest rate steps that the major central banks in the US and Europe will take to curb inflation have turned very rosy. For the major industrialized countries, average inflation was 7.3 percent in 2022, falling to 4.6 percent this year and 2.6 percent in 2024. That is still above the policy target of 2 percent.
Also read this background piece about the economic climate: Rarely has the economic wind turned so fast
In addition, the Fund points out that although inflation is falling, core inflation – excluding energy and food – remains stubbornly high. Central banks pay particular attention to core inflation. A meeting of the US Federal Reserve ends on Wednesday with the announcement of the next rate hike. An equally crucial meeting of the European Central Bank will follow on Thursday.
The risks to today’s forecast, according to the IMF, are still mostly on the downside, with a higher chance of disappointing them anyway. But those risks are much less than was thought in October.