Global economy shows signs of resilience despite lingering threats

Economy
By Editor_1
Shoppers in New York’s SoHo neighbourhood on July 11, 2023. In its latest forecast, the International Monetary Fund’s expects US consumption to begin to wane in the coming months as Americans draw down their savings and interest rates increase further -Amir Hamja/ The New York Times
By Alan Rappeport, Eshe Nelson and Jeanna Smialek

WASHINGTON – The world economy is showing signs of resilience this year despite lingering inflation and a sluggish recovery in China, the International Monetary Fund (IMF) said Tuesday (25), raising the odds that a global recession could be avoided barring unexpected crises.

The signs of optimism in the IMF’s latest World Economic Outlook may also give global policymakers additional confidence that their efforts to contain inflation without causing serious economic damage are working. Global growth, however, remains meagre by historical standards, and the fund’s economists warned that serious risks remained.

The IMF raised its forecast for global growth this year to 3%, from 2.8% in its April projection. It predicted that global inflation would ease from 8.7% in 2022 to 6.8% this year and 5.2% in 2024, as the effects of higher interest rates filter throughout the world.

The outlook was rosier in large part because financial markets — which had been roiled by the collapse of several large banks in the United States and Europe — have largely stabilized. Another big financial risk was averted in June when Congress acted to lift the US government’s borrowing cap, ensuring that the world’s largest economy would continue to pay its bills on time.

The new figures from the IMF come as the Federal Reserve is widely expected to raise interest rates by a quarter point at its meeting this week, while keeping its future options open. The Fed has been aggressively raising rates to try to tamp down inflation, lifting them from near zero as recently as March 2022 to a range of 5% to 5.25% today. Policymakers have been trying to cool the economy without crushing it and held rates steady in June to assess how the US economy was absorbing the higher borrowing costs that the Fed had already approved.

As countries like the United States continue to grapple with inflation, the IMF urged central banks to remain focused on restoring price stability and strengthening financial supervision.

Fed officials will release their July interest rate decision Wednesday (26), followed by a news conference with Fed Chair Jerome Powell. Policymakers had previously forecast that they might raise rates one more time in 2023 beyond the expected move this week. While investors doubt that they ultimately will make that final rate move, officials are likely to want to see more evidence that inflation is falling and the economy is cooling before committing in any direction.

The IMF said Tuesday that it expected growth in the United States to slow from 2.1% last year to 1.8% in 2023 and 1% in 2024. It expects consumption, which has remained strong, to begin to wane in the coming months as Americans draw down their savings and interest rates increase further.

Growth in the euro area is projected to be just 0.9% this year, dragged down by a contraction in Germany, the region’s largest economy, before picking up to 1.5% in 2024.

European policymakers are still occupied by the struggle to slow down inflation. On Thursday (27), the European Central Bank is expected to raise interest rates for the 20 countries that use the euro currency to the highest level since 2000. But after a year of pushing up interest rates, policymakers at the central bank have been trying to shift the focus from how high rates will go to how long they may stay at levels intended to restrain the economy and stamp out domestic inflationary pressures generated by rising wages or corporate profits.

Policymakers have raised rates as the economy has proved slightly more resilient than expected this year, supported by a strong labour market and lower energy prices. But the economic outlook is still relatively weak, and some analysts expect that the European Central Bank is close to halting interest rate increases amid signs that its restrictive policy stance is weighing on economic growth. On Monday, an index of economic activity in the eurozone dropped to its lowest level in eight months in July, as the manufacturing industry contracted further and the services sector slowed down.

Next week, the Bank of England is expected to raise interest rates for a 14th consecutive time in an effort to force inflation down in Britain, where prices in June rose 7.9% from a year earlier.

Britain has defied some expectations, including those of economists at the IMF, by avoiding a recession this year. But the country still faces a challenging set of economic factors: Inflation is proving stubbornly persistent in part because a tight labour market is pushing up wages, while households are growing increasingly concerned about the impact of high interest rates on their mortgages because the repayment rates tend to be reset every few years.

A weaker-than-expected recovery in China, the world’s second-largest economy, is also weighing on global output. The IMF pointed to a sharp contraction in the Chinese real estate sector, weak consumption and tepid consumer confidence as reasons to worry about China’s outlook.

Official figures released this month showed that China’s economy slowed markedly in the spring from earlier in the year, as exports tumbled, a real estate slump deepened and some debt-ridden local governments had to cut spending after running low on money.

Despite reasons for optimism, the IMF report makes plain that the world economy is not in the clear.

Russia’s war in Ukraine continues to pose a threat that could send global food and energy prices higher, and the fund noted that the recently terminated agreement that allowed Ukrainian grain to be exported could portend headwinds.

“The war in Ukraine could intensify, further raising food, fuel and fertilizer prices,” the report said. “The recent suspension of the Black Sea Grain Initiative is a concern in this regard.”

It also reiterated its warning against allowing the war in Ukraine and other sources of geopolitical tension to further splinter the world economy.

“Such developments could contribute to additional volatility in commodity prices and hamper multilateral cooperation on providing global public goods,” the IMF said.

-New York Times

 

Editor_1
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