According to the International Monetary Fund (IMF), global economic growth is slowing as a result of the volatile banking sector, high inflation, and rising interest rates.
Total economic output is expected to rise 2.8% this year, down from 3.4% last year, as nations recover from slumps caused by the pandemic and the Ukraine war, according to the IMF’s latest World Economic Outlook report. Its new 2023 forecast was only 0.1 percentage point lower than its January projection.
According to the report, the multilateral financial organization expects global growth to accelerate to 3% next year, citing some encouraging signs.
The reopening of China following its long pandemic lockdown is reviving the Asian economy. Consumer demand and job markets in the United States and Europe are supporting economic growth. Emerging markets are growing faster than developed countries, and supply-chain disruptions seen during the pandemic and after Russia’s invasion of Ukraine are easing.
However, the risks to growth have increased significantly, according to IMF economists, referring to the banking system turmoil that erupted in March. The abrupt, perilous decline in confidence in the banking system resulted in the failure of two midsize US banks and the forced acquisition of Credit Suisse Group AG by its longtime rival UBS Group AG.
“The financial challenges that a number of countries have faced cast a shadow on our outlook,” said Pierre-Olivier Gourinchas, research director at the IMF. “We see a lot of downside risks in the future.”
Another major risk, he said, is persistent inflation, which would necessitate central banks raising interest rates above what is currently expected. According to the IMF, global inflation will slow to 7% this year and 4.9% in 2024, down from 8.7% in 2022. However, the organization expects underlying core inflation, which excludes volatile energy and food prices, to slow.
As a result, the economy has entered a perilous phase in which financial risks have increased while inflation has not been contained, even though growth remains low by historical standards.
The IMF’s longer-term outlook is still bleak. The effects of the Ukraine war and the growing rivalry between the United States and China continue to weigh on the global economy. The IMF has warned against economic fragmentation, or the division of the global trading system into rival blocs led by the United States and its allies or China, Russia, and their allies.
Looking ahead five years, the IMF predicts global economic growth of 3% in 2028, the lowest level in decades.
“That does not give us high hope for meeting the aspirations of people, especially poor people, around the world and, most importantly, poor people in poor countries,” IMF director Kristalina Georgieva said Monday as she opened the IMF and World Bank spring meetings.
According to the IMF, advanced economies in Europe are driving the global slowdown this year. The eurozone economy is expected to grow by 0.8% this year, down from 3.5% last year. The economy of the United Kingdom is expected to contract by 0.3% in 2023 after expanding by 4% in 2022.
The US economy will grow 1.6% this year, down from 2.1% in 2022, says the IMF.
Meanwhile, China’s growth is expected to accelerate to 5.2% this year, up from 3% last year.