The global economy has lost pace from the impact of higher interest rates, the invasion of Ukraine and widening geopolitical rifts, and it now faces new uncertainty from the conflict between Israel and the Palestinian resistance group Hamas, the International Monetary Fund (IMF) warned Tuesday.
In its latest World Economic Outlook, the IMF cut its growth forecasts for China and the eurozone and said overall global growth remained low and uneven despite what it called the "remarkable strength" of the U.S. economy.
The organization said it expects global gross domestic product (GDP) growth to slow to 2.9% in 2024 from an expected 3% this year. The forecast for next year is down a notch from the 3% it predicted back in July.
The deceleration comes at a time when the world has yet to fully mend from a devastating but short-lived COVID-19 recession in 2020 and now could see fallout from the Middle East conflict – particularly to oil prices.
A series of previous shocks, including the pandemic and Russia's invasion of Ukraine, has slashed worldwide economic output by about $3.7 trillion over the past three years compared with pre-COVID-19 trends.
"The global economy is limping along, not sprinting," IMF chief economist Pierre-Olivier Gourinchas said.
The IMF's expectation of 3% growth this year is down from 3.5% in 2022 but unchanged from its July projections.
Gourinchas said the global economy continued to recover from COVID-19, Russia's military campaign in Ukraine and last year's energy crisis, but that diverging growth trends meant "mediocre" medium-term prospects.
He said the forecasts generally pointed to a soft landing, but the IMF remained concerned about risks related to China's property crisis, volatile commodity prices, geopolitical fragmentation and a resurgence in inflation.
A fresh risk emerged in the form of the Israel-Hamas conflict just as officials from 190 countries met in Marrakech for the IMF and World Bank annual meetings, but came after the IMF's quarterly outlook update was locked down on Sept. 26.
It's "too early" to assess the impact on global economic growth from the days-old conflict in Gaza, Gourinchas said. He stated the IMF was "monitoring the situation closely" and noted that oil prices have risen by about 4% in the past several days.
"We've seen that in previous crises and previous conflicts. And of course, this reflects the potential risk that there could be disruption either in production or transport of oil in the region," he said.
If sustained, a 10% increase in oil prices would reduce global economic growth by 0.15% and increase global inflation by 0.4%, Gourinchas said.
"But again, I emphasize that it's really too early to jump to any conclusion here," he added.
Stronger growth is being throttled by the lingering impact of the pandemic, the Ukraine war, and increasing fragmentation, along with rising interest rates, extreme weather events, and shrinking fiscal support, the IMF said.
"The global economy is showing resilience. It's not knocked out by the big shocks it's experienced in the last two or three years, but it's not doing too great either," Gourinchas said. "We see a global economy that is limping along and it's not quite sprinting yet."
The medium-term outlook was "darker" especially for emerging economies, which faced a slower catch-up in living standards and more debt worries, Gourinchas told a news conference.
Even in 2028, the IMF is projecting global growth of just 3.1%.
"You have uncertainty. You have geo-economic fragmentation, low productivity growth and low demographics. You put all these things together and you have a slowdown in medium-term growth," Gourinchas told Reuters.
Inflation continued to decline around the globe due to a fall in energy prices and to a lesser extent food prices, but it remains too high. The U.S. Federal Reserve (Fed) and other central banks worldwide have aggressively raised interest rates to combat a resurgence in inflation.
It is expected to drop to an annual average of 6.9% in 2023 from 8.7% in 2022 and to 5.8% in 2024.
Core inflation, excluding food and energy, should drop more gradually – to 6.3% in 2023 from 6.4% in 2022, and to 5.3% in 2024 – given tight labor markets and stickier-than-expected services inflation, the IMF said.
"Inflation remains uncomfortably high," Gourinchas said, warning: "Central banks ... must avoid a premature easing."
The rate hikes have helped ease price pressures without putting many people out of work. That combination, he said, is "increasingly consistent" with a so-called soft landing – the idea that inflation can be contained without causing a recession.
Labor markets were buoyant and unemployment rates low in most advanced economies, but there was not much evidence of a wage-price inflation spiral, even with a major strike by U.S. autoworkers in the United States.
"We're not seeing strong signs of an out-of-control sequence of wages chasing prices and prices chasing wages," he told Reuters.
The IMF said uncertainty had narrowed since its April forecasts, but there was still more downside than upside risks for 2024. The chance of growth falling below 2% – which has only occurred five times since 1970 – was now seen at 15%, compared with 25% in April.
The IMF noted that investment was uniformly lower than before the pandemic, with businesses showing less appetite for expansion and risk-taking given higher interest rates, stricter lending conditions and less fiscal support.
Gourinchas said the fund was also advising countries to rebuild thin fiscal buffers against future shocks, noting that a substantial deterioration in fiscal deficits in the United States was "most worrying."
The United States is a standout in the IMF's latest World Economic Outlook, which was completed before the outbreak of clashes between Israel and Hamas.
The organization raised its forecast for U.S. growth by 0.3 percentage points to 2.1% for 2023, and by 0.5 percentage points to 1.5% for next year, citing stronger business investment and growing consumption. That makes the United States the only major economy to beat pre-pandemic forecasts.
China was forecast to grow 5% in 2023 but slow to 4.2% in 2024, 0.2 and 0.3 percentage points less than previously expected, due to a property crisis and weak external demand.
If the real estate crisis deepened, China's growth could be lowered by as much as 1.6% percentage points, which in turn would knock 0.6 percentage points off global growth, Gourinchas said.
Unless China takes "forceful action" to clean up the real estate sector, the "problem could fester and become worse."
Things are also gloomier in the 20 countries that share the euro currency and are more exposed to rising energy prices. The IMF downgraded eurozone growth to 0.7% this year and 1.2% in 2024, from July forecasts of 0.9% and 1.5%.
It actually expects the German economy to shrink by 0.5% this year before recovering to 0.9% growth next year.
That's below even Russia's economy, which the IMF predicts will expand 2.2% this year before dropping to 1.1% growth next year.
The U.K., also hit hard by high energy prices, saw its growth forecast raised by 0.1 percentage point to 0.5% for 2023, but cut by 0.4 percentage points to 0.6% for 2024.
Japan is expected to grow 2% in 2023, a 0.6 percentage point upward revision, buoyed by pent-up demand, a surge in inbound tourism, its accommodative monetary policy, and a rebound in auto exports, the IMF said. It left Japan's 2024 growth outlook unchanged at 1%.
The Turkish economy is seen growing by 4% this year, up from the IMF's earlier forecast of 3%. The organization expects the economy to expand by 3% next year, up from 2.8% estimated in its July report.
The IMF stated that the overhaul in Türkiye's economic policies that started after the May elections has reduced risks and increased investor confidence, stating that change should continue by gaining momentum.
