Explained: IMF lifts 2023 global growth forecast in World Economic Outlook updated report

The International Monetary Fund (IMF) released its World Economic Outlook update on Monday (January 30), in which they said global growth is set to be higher than expected this year. This has largely been attributed to strong consumption and increased investment. The forecasted growth for 2023 is 0.2 percentage points higher than predicted in its previous outlook released in October 2022.

What does the report say about the global outlook?

According to the report, global growth is projected to fall from an estimated 3.4 per cent in 2022 to 2.9 per cent in 2023, then rise to 3.1 per cent the year after. Furthermore, it predicts a decline in global inflation from 8.8 per cent in 2022 to 6.6 per cent in 2023 and 4.3 per cent in 2024 but it remains at least 3.5 per cent above the pre-pandemic level between 2017 and 2019. This has largely been attributed to the fact that “adverse risks” have been “moderated” since the last report in October.

The Washington-based lender has also noted how Russia’s war in Ukraine, as well as the central banks across different countries increasing their interest rates in a bid to combat inflation, continue to weigh on economic activity. However, China re-opening after the rapid spread of COVID-19 in the country, last year,has also paved the way for a “faster-than-expected recovery” and accelerating vaccination rates in the country would safeguard this recovery, said the IMF report. It added, “severe health outcomes in China could “hold back” this progress.

Another factor that could affect global growth is an escalation in the conflict between Russia and Ukraine and tighter global financing costs which could worsen debt distress, as per the report. While the news of adverse inflation could suddenly re-price financial markets and further “geopolitical fragmentation” could hamper economic progress.

The report also mentioned reasons like stronger-than-expected consumption and investment in the third quarter of 2022 as well as a robust labour market and strong consumer balance sheets for an overall rise in predicted growth. “The year ahead will still be challenging...but it could well represent a turning point with growth bottoming out and inflation declining,” said the IMF chief economist, Pierre-Olivier Gourinchas, while addressing a press conference, as per AFP.

The IMF chief economist also said that the risk of the world facing a recession has been subdued and that central banks are making progress on controlling inflation.

India retains its ‘bright spot’ status

The global projections for India have remained unchanged since the last outlook report by the IMF which predicted a 6.8 per cent growth for this current fiscal year until March, said Gourinchas. He added, “we're expecting some slowdown to 6.1 per cent in fiscal year 2023. And that is largely driven by external factors”. The report also noted this aspect but said that India may continue with, “resilient domestic demand despite external headwinds.”

“I want to say, we had a positive view on India in our October forecast. That positive view is largely unchanged,” Gourinchas said in response to a question. In his blog, he also went on to say that India remains a bright spot and along with China it would account for half of the global growth this year.

China expected to witness a sharp rise in growth after reopening

After China dropped its zero-Covid policies following protests in December, the IMF in its recent report has predicted a sharply high global outlook which has been raised to 5.2 per cent from the previous 4.4 per cent. This comes after its growth rate last year was slashed to 3 per cent which was not only below the world average but also marked the first time it had been so low in the last four decades or so.

However, the expected rise in growth may be short-lived as it might fall back to 4.4 per cent, as per the report. The Washington-based fund agency has attributed this possible decline to “business dynamism and slow progress on structural reforms.” According to Gourinchas, while the reopening of China could put some pressure on commodity prices, the IMF largely views the ease in restrictions as to “benefit to the global economy”. He added that it will help ease production bottlenecks which have worsened inflation recently and by the creation of demand from Chinese households.

The US, UK and eurozone

In its recently updated outlook, the IMF also predicted that US GDP will grow by 1.4 per cent from one per cent, as mentioned in its previous report, which could be due to stronger-than-expected consumption and investment in the third quarter of 2022. Meanwhile, the eurozone, which is a group of 20 countries in the European Union that use euros as its primary currency, may also see some growth in their GDP which has increased from 0.5 per cent in last year’s report to 0.7 per cent in the updated version.

However, things are not looking good for the United Kingdom which was one of the only major advanced economies Group of Seven that the IMF predicted to be in recession in 2023 as well as a sharp downgrade in growth this year. According to the recent report, Britain might see a decline of 0.6 per cent in GDP as households continue to struggle with the cost of living crisis.

According to the IMF, the UK has particularly suffered after the rise in fuel prices following the Russian invasion of Ukraine due to its heavy reliance on gas for power generation. This also came as the country faced mass walkouts over wage disputes and working conditions from virtually every sector in the country, which led to a shortage of workers and further slowed down the economy.

Subsequently, in a bid to control inflation the Bank of England announced interest rate hikes. The IMF chief economist believes that this is because of all these factors which have “lead to a fairly sharp retrenchment of activity in 2023”. He added this comes after the UK was expected to account for one of the highest growth rates in 2022 among European countries at 4.1 per cent, as per Reuters.

Outlook for ASEAN countries

The group of ten member countries in Southeast Asia, Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam, are set to witness downgrades to their 2023 growth outlooks. This has been attributed to the global economic slowdown which has outweighed the benefits and positive impact of China’s reopening after COVID-19.

This prompted the IMF to reduce Singapore’s GDP outlook for 2023 from 2.3 per cent in the previous forecast to 1.5 per cent in the updated one, said Gourinchas, as per Reuters. Additionally, the overall growth predictions for ASEAN-5 (group of five countries, Indonesia, Malaysia, the Philippines, Singapore, and Thailand), were reduced to 4.3 per cent from 4.5 per cent.

(With inputs from agencies)

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