Home Economic Indicator IMF downgrades growth forecast for China and euro area, cites sluggish global economy.

IMF downgrades growth forecast for China and euro area, cites sluggish global economy.

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IMF downgrades growth forecast for China and euro area, cites sluggish global economy.

IMF Cuts Growth Forecast for China and Euro Area, Global Economy Limping Along

IMF Lowers Growth Forecasts

The International Monetary Fund (IMF) has reduced its growth forecasts for China and the euro area, citing low and uneven global growth despite the strong performance of the U.S. economy. In its latest World Economic Outlook (WEO), the IMF kept its forecast for global real GDP growth in 2023 unchanged at 3.0%, but lowered its forecast for 2024 by 0.1 percentage point to 2.9%. The global output grew by 3.5% in 2022. IMF chief economist Pierre-Olivier Gourinchas highlighted the divergent growth trends across the globe and expressed concerns about risks related to the real estate crisis in China, volatile commodity prices, geopolitical fragmentation, and a resurgence in inflation.

Global Economy Faces Challenges

Gourinchas emphasized that the global economy is gradually recovering from the impacts of the COVID-19 pandemic, Russia’s invasion of Ukraine, and last year’s energy crisis. However, he noted that the growth outlook for the medium term is mediocre, with the global economy “limping along” rather than sprinting forward. The IMF raised concerns about the lingering effects of the pandemic, Russia’s war in Ukraine, increasing fragmentation, rising interest rates, extreme weather events, and reduced fiscal support. The IMF estimates that total global output in 2023 will be 3.4% lower than pre-pandemic projections, amounting to approximately $3.6 trillion.

Uncertainty and Inflation

The IMF highlighted that inflation rates are declining globally due to lower energy and food prices. It expects inflation to drop to an annual average of 6.9% in 2023 and 5.8% in 2024. Core inflation, which excludes food and energy prices, is projected to decline more gradually. Gourinchas cautioned against premature easing of interest rates and stated that there is no evidence of a wage-price spiral triggering a second round of price inflation, even with the recent strike by U.S. autoworkers.

IMF’s Revised Growth Forecasts

The IMF revised its growth forecast for the United States, increasing it by 0.3 percentage point to 2.1% for 2023 and by 0.5 percentage point to 1.5% for 2024. The U.S. is the only major economy surpassing pre-pandemic forecasts. In contrast, China’s GDP is expected to expand by 5.0% in 2023 and 4.2% in 2024, reflecting downward revisions mainly due to the real estate crisis and weak external demand. The IMF also lowered its growth estimates for the euro area to 0.7% in 2023 and 1.2% in 2024. Japan, on the other hand, is expected to see growth of 2.0% in 2023, buoyed by pent-up demand, accommodative monetary policy, and a rebound in auto exports.

IMF’s Recommendations

The IMF urged countries to remain vigilant on monetary policy until inflation stabilizes and advised them to build fiscal buffers to address future challenges or shocks. It emphasized the need for “forceful action” in China to address the real estate sector’s challenges. The IMF also highlighted the lower investment levels compared to pre-pandemic times, with businesses showing less appetite for expansion and risk-taking due to rising interest rates, reduced fiscal support, and stricter lending conditions.

Conclusion

The global economy continues to face challenges with divergent growth trends and risks such as real estate crises, volatile commodity prices, geopolitical fragmentation, and inflation. The IMF’s revised growth forecasts reflect the ongoing impacts of the COVID-19 pandemic, Russia’s war in Ukraine, and other factors. It remains crucial for countries to maintain cautious monetary policies, build fiscal buffers, and take necessary actions to address existing challenges and promote sustainable growth.