IMF downgrades growth forecasts for China and Euro area, cites uneven global recovery

The International Monetary Fund (IMF) has revised its growth projections downward for both China and the euro area while emphasising the uneven and sluggish nature of the global economic recovery. Despite acknowledging the "remarkable strength" of the U.S. economy, the IMF has trimmed its global real GDP growth forecast for 2024 by 0.1 percentage points to 2.9 per cent, from its July projection, while maintaining the 2023 growth forecast at 3.0 per cent. In comparison, world output expanded by 3.5 per cent in 2022.

Reuters cited Pierre-Olivier Gourinchas, Chief Economist at the IMF, who noted that while the global economy is recovering from the COVID-19 pandemic, Russia's invasion of Ukraine, and last year's energy crisis, growth trends vary widely across different regions. He expressed concerns about medium-term growth prospects, describing them as "mediocre." Gourinchas also highlighted several risks, including the real estate crisis in China, volatile commodity prices, geopolitical fragmentation, and resurgence in inflation.

Regarding the recent Israel-Palestinian conflict, Gourinchas stated that it was too early to assess its potential impact on the global economy, emphasising the need to consider various scenarios that have yet to be explored.

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The IMF's outlook underscores the challenges facing the global economy, characterised by the persistent effects of the pandemic, Russia's conflict in Ukraine, rising interest rates, extreme weather events, and reduced fiscal support. The total global output in 2023 is expected to be 3.4 per cent lower than pre-pandemic projections, equating to approximately $3.6 trillion.

Gourinchas described the current state of the global economy as "limping along" and falling short of a full recovery. The IMF's medium-term outlook predicts growth of 3.1 per cent in 2028, a significant drop from the 4.9 per cent forecast made just before the global financial crisis of 2008-2009.

Regarding inflation, the IMF expects a decline due to lower energy and food prices. It anticipates a drop in annual average inflation to 6.9 per cent in 2023, down from 8.7 per cent in 2022, and further to 5.8 per cent in 2024. Core inflation, which excludes food and energy prices, is expected to decrease gradually, reaching 6.3 per cent in 2023 and 5.3 per cent in 2024.

Gourinchas cautioned against premature interest rate cuts, citing strong labour markets and the absence of a wage-price spiral despite robust employment and low unemployment rates in most advanced economies.

The IMF recommended that countries remain vigilant with their monetary policies until inflation shows sustained decline and urged them to rebuild fiscal buffers to address future challenges or shocks.

In terms of growth, the IMF raised its growth forecast for the United States, citing strong business investment and consumption, making it the only major economy surpassing pre-pandemic projections. In contrast, China's GDP growth is expected to slow to 5.0 per cent in 2023 and 4.2 per cent in 2024, primarily due to a real estate crisis and weak external demand.

The IMF also downgraded its growth estimates for the euro area to 0.7 per cent in 2023 and 1.2 per cent in 2024, while the UK saw its growth forecast revised upward for 2023 but lowered for 2024. Japan is expected to experience growth of 2.0 per cent in 2023, mainly driven by pent-up demand, tourism, monetary policy, and auto exports, with a stable outlook for 2024.

(Inputs from Reuters)

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