Economics news: IMF raises global growth forecasts for 2023

  • This weekly round-up brings you the latest stories from the world of economics and finance.
  • Top economy stories: IMF ups its global economic growth forecasts; US, ECB and UK raise interest rates; Global factory activity contracts again; India plans major boost to capital spending.

1. IMF raises growth forecasts for 2023

The International Monetary Fund (IMF) has made a slight increase to its global growth outlook for 2023, due to “surprisingly resilient” demand in the United States and Europe, easing energy costs and the reopening of China’s economy after Beijing abandoned its strict COVID-19 restrictions.

It still sees the pace of global growth falling this year compared with 2022, but by a smaller margin than it predicted in October. The IMF is now forecasting 2.9{515baef3fee8ea94d67a98a2b336e0215adf67d225b0e21a4f5c9b13e8fbd502} growth for 2023 – up from a 2.7{515baef3fee8ea94d67a98a2b336e0215adf67d225b0e21a4f5c9b13e8fbd502} forecast in October – versus 3.4{515baef3fee8ea94d67a98a2b336e0215adf67d225b0e21a4f5c9b13e8fbd502} growth last year.

The figures are in its latest World Economic Outlook, which warns that the world could easily fall into recession this year. “Central banks are likely to continue to tighten monetary policy to fight inflation, and concerns that this restrictive stance could tip the economy into a recession have increased in major advanced economies,” the report says.

The IMF now expects US GDP growth of 1.4{515baef3fee8ea94d67a98a2b336e0215adf67d225b0e21a4f5c9b13e8fbd502} this year, up from a 1.0{515baef3fee8ea94d67a98a2b336e0215adf67d225b0e21a4f5c9b13e8fbd502} prediction in October and following 2.0{515baef3fee8ea94d67a98a2b336e0215adf67d225b0e21a4f5c9b13e8fbd502} growth in 2022. This is down to stronger-than-expected consumption and investment in the third quarter of 2022, a robust labour market and strong consumer balance sheets.

The Eurozone outlook is also up – to 0.7{515baef3fee8ea94d67a98a2b336e0215adf67d225b0e21a4f5c9b13e8fbd502}, versus 0.5{515baef3fee8ea94d67a98a2b336e0215adf67d225b0e21a4f5c9b13e8fbd502} in October, although this is down from 3.5{515baef3fee8ea94d67a98a2b336e0215adf67d225b0e21a4f5c9b13e8fbd502} growth in 2022. The IMF says Europe has adapted to higher energy costs more quickly than expected.

World Economic Outlook January 2023: Growth projections by region

The IMF has raised its forecast for global growth this year.

Image: IMF

The IMF has revised China’s growth outlook sharply higher, to 5.2{515baef3fee8ea94d67a98a2b336e0215adf67d225b0e21a4f5c9b13e8fbd502} from a 4.4{515baef3fee8ea94d67a98a2b336e0215adf67d225b0e21a4f5c9b13e8fbd502} forecast in October. Zero-COVID policies in 2022 slashed China’s growth rate to 3.0{515baef3fee8ea94d67a98a2b336e0215adf67d225b0e21a4f5c9b13e8fbd502}, putting it below the global average for the first time in more than 40 years.

India’s outlook remains robust, with unchanged forecasts for a dip in 2023 growth to 6.1{515baef3fee8ea94d67a98a2b336e0215adf67d225b0e21a4f5c9b13e8fbd502} but a rebound to 6.8{515baef3fee8ea94d67a98a2b336e0215adf67d225b0e21a4f5c9b13e8fbd502} in 2024, matching its 2022 performance.

Britain is the only major economy the IMF expects to shrink this year. It forecasts a 0.6{515baef3fee8ea94d67a98a2b336e0215adf67d225b0e21a4f5c9b13e8fbd502} fall in GDP as households struggle with rising living costs, including for energy and mortgages.

For 2024, the IMF has cut its global growth forecast very slightly to 3.1{515baef3fee8ea94d67a98a2b336e0215adf67d225b0e21a4f5c9b13e8fbd502}, from 3.2{515baef3fee8ea94d67a98a2b336e0215adf67d225b0e21a4f5c9b13e8fbd502} in October.

2. US, ECB and UK raise interest rates, but indicate differing paths ahead

The US central bank has slowed the pace of its interest rate rises but says there will be “ongoing increases” as it continues to battle inflation. The Federal Reserve has increased its benchmark overnight interest rate by a quarter of a percentage point, taking it to a range of 4.50-4.75{515baef3fee8ea94d67a98a2b336e0215adf67d225b0e21a4f5c9b13e8fbd502}. This follows six larger rises in a row, including three consecutive jumps of three-quarters of a percentage point.

Federal Reserve Chair Jerome Powell says that while inflation has begun to slow, he expects a couple more rate hikes in the months ahead and does not see the Fed cutting rates this year.

US job openings unexpectedly rose in December, showing that demand for labour remains strong despite higher interest rates and mounting fears of a recession, and this could keep the Fed on its policy tightening path. However, a fall in consumer spending for a second straight month in December suggests reduced need for overly aggressive monetary policy.

Fed policy has an impact not just in the US but across global financial markets, as it affects currency exchange rates and other countries often mirror changes to US interest rates.

The European Central Bank (ECB) has raised interest rates by half a percentage point this month to 2.5{515baef3fee8ea94d67a98a2b336e0215adf67d225b0e21a4f5c9b13e8fbd502} and explicitly signalled at least one more hike of the same magnitude next month.

“We know that we have ground to cover, we know that we are not done,” ECB President Christine Lagarde said, reiterating previous comments that the bank will “stay the course” in the fight to bring inflation back down to its target of around 2{515baef3fee8ea94d67a98a2b336e0215adf67d225b0e21a4f5c9b13e8fbd502}.

And the Bank of England has raised interest rates for the 10th time in a row, but dropped its pledge to keep increasing them “forcefully” if needed, saying that inflation has probably peaked. Rates now stand at 4.0{515baef3fee8ea94d67a98a2b336e0215adf67d225b0e21a4f5c9b13e8fbd502}, their highest since 2008, up from 3.5{515baef3fee8ea94d67a98a2b336e0215adf67d225b0e21a4f5c9b13e8fbd502} beforehand.

The bank says its run of rate hikes going back to December 2021 is likely to have an increasing impact on the economy. It is trying to put the brakes on inflation of 10{515baef3fee8ea94d67a98a2b336e0215adf67d225b0e21a4f5c9b13e8fbd502}.

It believes Britain is still on course for a recession, but a “much shallower” one than previously forecast, thanks largely to a fall in energy prices. It now sees GDP contracting by 0.5{515baef3fee8ea94d67a98a2b336e0215adf67d225b0e21a4f5c9b13e8fbd502} in 2023, compared with a 1.5{515baef3fee8ea94d67a98a2b336e0215adf67d225b0e21a4f5c9b13e8fbd502} forecast in November.

News in brief: Stories on the economy from around the world

Manufacturing activity across the United States, Europe and Asia contracted again in January, underscoring the fragility of the global economic recovery. However, Eurozone factory activity may have passed its lowest point, with the Purchasing Managers’ Index (PMI) for manufacturing reaching a five-month high of 48.8 – although any number below 50 still indicates contraction.

China’s economic activity swung back to growth in January, after a wave of COVID-19 infections passed through the country faster than expected following Beijing’s abandoning of pandemic controls. The official PMI rose to 50.1 in January from 47.0 in December, as domestic orders and consumption drove manufacturing output higher.

China economic activity rebounds in January 2023

China’s economic activity returned to growth in January.

Image: Reuters

India will make one of its biggest ever boosts to capital spending in its 2023-2024 fiscal year, as it looks to create jobs. It will boost spending by 33{515baef3fee8ea94d67a98a2b336e0215adf67d225b0e21a4f5c9b13e8fbd502} for the year from 1 April, taking it to about $122.3 billion, following rises of 37{515baef3fee8ea94d67a98a2b336e0215adf67d225b0e21a4f5c9b13e8fbd502} in 2020-2021 and 2021-2022.

India's capital expenditure to increase by 33{515baef3fee8ea94d67a98a2b336e0215adf67d225b0e21a4f5c9b13e8fbd502}

India is making one of its biggest ever boosts to capital spending.

Image: Reuters

The move comes after India’s finance ministry said it sees GDP growth slowing slightly for the 2023-2024 fiscal year because the global economic slowdown will impact its exports. It expects growth of 6.0-6.8{515baef3fee8ea94d67a98a2b336e0215adf67d225b0e21a4f5c9b13e8fbd502}, down from projected 7{515baef3fee8ea94d67a98a2b336e0215adf67d225b0e21a4f5c9b13e8fbd502} growth for the current fiscal year.

Eurozone GDP unexpectedly expanded in the fourth quarter of 2022, but only by 0.1{515baef3fee8ea94d67a98a2b336e0215adf67d225b0e21a4f5c9b13e8fbd502} compared with three months earlier. This means the bloc has managed to avoid a recession, although the outlook for 2023 remains weak due to a large drop in real incomes and surging interest rates.

However, suggestions of a recovery are emerging, with Eurozone economic sentiment rising to a seven-month high in January. There is increased optimism across all sectors except construction, as inflation expectations fall sharply. The Eurozone Composite PMI – which covers the manufacturing and service sectors – also points to modest growth, as reported in last week’s economics round-up.

The German economy unexpectedly shrank by 0.2{515baef3fee8ea94d67a98a2b336e0215adf67d225b0e21a4f5c9b13e8fbd502} in the fourth quarter of 2022 compared with three months earlier. It’s seen as a sign that Europe’s largest economy may be entering a much-predicted recession, although likely a shallower one than originally feared.

South Korea appears to be heading towards its first recession in three years, after its trade deficit hit a record level in January following a 16.6{515baef3fee8ea94d67a98a2b336e0215adf67d225b0e21a4f5c9b13e8fbd502} slump in exports. Asia’s fourth-largest economy relies heavily on trade for growth, but exports have been falling because of the slowing global economy. South Korea’s GDP for October-December fell by 0.4{515baef3fee8ea94d67a98a2b336e0215adf67d225b0e21a4f5c9b13e8fbd502} compared with the previous quarter.

Indonesia’s economic growth likely slowed in the fourth quarter as declining commodity and energy prices hit exports, and a widely expected global recession could accelerate the slowdown this year, according to a Reuters poll.

Turkish President Recep Tayyip Erdogan has said benchmark interest rates will keep falling. Turkey’s monetary policy has defied convention in the past two years, with abrupt cycles of rate easing despite surging inflation, Bloomberg reports.

More on the economy on Agenda

Will energy bills start to come down this year? Yes, according to 64{515baef3fee8ea94d67a98a2b336e0215adf67d225b0e21a4f5c9b13e8fbd502} of chief economists surveyed by the World Economic Forum. But they say that reducing consumption will be the most effective way to ease the crisis in the short-term.

Women around the world are being disproportionately affected by the cost of living crisis, according to UN research. It says women are the “shock absorbers of poverty”, noting that their position as primary care providers in many countries means they are often less able than men to increase their hours of paid work.

How do US employment numbers compare to the pre-pandemic era? Certain sectors are still struggling, official data show, most notably leisure and hospitality, which is almost 1 million jobs short of its February 2020 level. The public sector is also lagging behind pre-COVID levels.

Francis McGee

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