Global outlook is uncertain amid financial sector turmoil, high inflation: IMF
Washington, DC, US (PANA) - Tentative signs in early 2023 that the world economy could achieve a soft landing—with inflation coming down and growth steady—have receded amid stubbornly high inflation and recent financial sector turmoil.
Although inflation has declined as central banks have raised interest rates and food and energy prices have come down, underlying price pressures are proving sticky, with labour markets tight in a number of economies.
In its ‘World Economic Outlook’ report for April 2023, the International Monetary Fund (IMF) indicates that side effects from the fast rise in policy rates are becoming apparent, as banking sector vulnerabilities have come into focus and fears of contagion have risen across the broader financial sector, including nonbank financial institutions.
Risks to the outlook are heavily skewed to the downside, with the chances of a hard landing having risen sharply, the report warns.
Although inflation has declined as central banks have raised interest rates and food and energy prices have come down, underlying price pressures are proving sticky, with labour markets tight in a number of economies.
Side effects from the fast rise in policy rates are becoming apparent, as banking sector vulnerabilities have come into focus and fears of contagion have risen across the broader financial sector, including nonbank financial institutions.
Risks to the outlook are heavily skewed to the downside, with the chances of a hard landing having risen sharply.
According to the report, the baseline forecast is for growth to fall from 3.4 per cent in 2022 to 2.8 per cent in 2023, before settling at 3.0 per cent in 2024. Advanced economies are expected to see an especially pronounced growth slowdown, from 2.7 per cent in 2022 to 1.3 per cent in 2023.
In a plausible alternative scenario with further financial sector stress, global growth declines to about 2.5 per cent in 2023 with advanced economy growth falling below 1 per cent. Global headline inflation in the baseline is set to fall from 8.7 per cent in 2022 to 7.0 per cent in 2023 on the back of lower commodity prices but underlying (core) inflation is likely to decline more slowly.
Inflation’s return to target is unlikely before 2025 in most cases.
The natural rate of interest is important for both monetary and fiscal policy as it is a reference level to gauge the stance of monetary policy and a key determinant of the sustainability of public debt.
Public debt as a ratio to GDP soared across the world during COVID-19 and is expected to remain elevated. Supply-chain disruptions and rising geopolitical tensions have brought the risks and potential benefits and costs of geoeconomic fragmentation to the centre of the policy debate.
But the report argues that such fragmentation can reshape the geography of foreign direct investment (FDI) and, in turn, how FDI fragmentation can affect the global economy.
FDI flows are increasingly concentrated among geopolitically aligned countries, particularly in strategic sectors. Several emerging market and developing economies are highly vulnerable to FDI relocation, given their reliance on FDI from geopolitically distant countries.
In the long term, FDI fragmentation arising from the emergence of geopolitical blocs can generate large output losses, especially for emerging market and developing economies.
Multilateral efforts to preserve global integration are the best way to reduce the large and widespread economic costs of FDI fragmentation.
-0- PANA AR/RA 12Apr2023
