IMF warns more economic shocks to come

The International Monetary Fund (IMF) has warned the global recovery remains fragile and fears there are more shocks to come.

The IMF has issued its 2023 World Economic Outlook – A Rocky Recovery, in which Pierre-Olivier Gourinchas, economic counsellor at the IMF warned The threat remains for developed nations particularly in Europe.

“On the surface, the global economy appears poised for a gradual recovery from the powerful blows of the pandemic and of Russia’s unprovoked war on Ukraine,” he wrote. “China is rebounding strongly following the reopening of its economy. Supply-chain disruptions are unwinding, while the dislocations to energy and food markets caused by the war are receding.

“Simultaneously, the massive and synchronous tightening of monetary policy by most central banks should start to bear fruit, with inflation moving back toward its targets.”

In its latest forecast, the IMF said global growth will bottom out at 2.8 percent this year before rising modestly to 3.0 percent in 2024. Global inflation will decrease, although more slowly than initially anticipated, from 8.7 percent in 2022 to 7.0 percent this year and 4.9 percent in 2024.

It added notably, emerging market and developing economies are already powering ahead in many cases, with growth rates (fourth quarter over fourth quarter) jumping from 2.8 percent in 2022 to 4.5 percent this year. The slowdown is concentrated in advanced economies, especially the euro area and the United Kingdom, where growth (also fourth quarter over fourth quarter) is expected to fall to 0.7 percent and –0.4 percent, respectively, this year before rebounding to 1.8 and 2.0 percent in 2024.

“Below the surface, however, turbulence is building, and the situation is quite fragile, as the recent bout of banking instability reminded us,” Gourinchas added. “Inflation is much stickier than anticipated even a few months ago. While global inflation has declined, that reflects mostly the sharp reversal in energy and food prices. But core inflation, excluding the volatile energy and food components, has not yet peaked in many countries.

“It is expected to decline to 5.1 percent this year a sizable upward revision of 0.6 percentage point from our January update, well above target.

“Activity too shows signs of resilience as labour markets remain historically tight in most advanced economies. At this point in the tightening cycle, we would expect to see stronger signs of output and employment softening. Instead, both output and inflation estimates have been revised upward for the past two quarters, suggesting stronger-than-expected demand, which may require monetary policy to tighten further or to stay tighter for longer.”

He continued: “Should we worry about the risk of an uncontrolled wage-price spiral? At this point, I remain unconvinced. Nominal wage inflation continues to lag far behind price inflation, implying a steep and unprecedented decline in real wages. Given the tightness in labour markets, this is unlikely to continue, and real wages should recover.”

Gourinchas  said the worry is that the sharp policy tightening of the past 12 months is starting to have serious side effects for the financial sector, as the IMF has repeatedly warned might happen.). Following a prolonged period of muted inflation and extremely low interest rates, last year’s rapid tightening of monetary policy has triggered sizable losses on long-term fixed-income assets.

“The stability of any financial system hinges on its ability to absorb losses without recourse to taxpayers’ money,” warned Gourinchas. “The financial instability last fall in the gilt market in the United Kingdom and the recent banking turbulence in the United States with the collapse of a few regional banks illustrate that significant vulnerabilities exist both among banks and nonbank financial institutions.

“In both cases the authorities took quick and strong action and have been able to contain the spread of the crisis so far. Yet the financial system may well be tested again.”