IMF raises growth forecasts as China reopens and gas prices fall

Global growth has proved “surprisingly resilient” and most countries will avoid a recession this year, the IMF said, as it upgraded its forecasts and hailed a possible turning point for the world economy.

In estimates that took into account China’s decision to scrap its zero-Covid policy last month, the fund said it expected the global economy to grow 3.2 percent between the end of the last quarter of 2022 and the end of the last quarter of this year.

That would mark a significant improvement from 2022, when the IMF estimates the global economy grew by 1[ads1].9 percent. The estimated growth of 3.2 per cent is also 0.5 percentage points higher than the IMF’s latest forecast, in October.

Pierre-Olivier Gourinchas, chief economist at the IMF, said 2023 “could well represent a turning point”, with economic conditions improving in subsequent years.

“We are far from anyone [sign of] global recession,” Gourinchas said, striking a stark contrast to statements by CEO Kristalina Georgieva this month that recession would hit more than a third of the world economy.

The IMF said its improved outlook reflected the opening of the Chinese economy and falling energy prices for Europe.

It predicted that the global economy would be 2.9 percent larger on average in 2023 than in 2022 – a different basis of calculation than the comparisons from the fourth quarter of this year and last year. That is a step down from the 3.4 percent pace projected for 2022.

But the IMF remained less optimistic than investors. With the MSCI World index of stocks up 7 percent since the start of the year and bond markets expecting interest rate cuts before 2024, traders have priced in a soft landing and painless reduction in inflation.

The fund expects Britain to be the only leading economy to shrink in 2023, with GDP forecast to be 0.5 percent smaller in the fourth quarter of the year than in the same period in 2022. Even Russia’s economy is likely to outpace Britain’s, according to its estimates , a growth of 1 percent in the same period.

Chinese growth, at 5.9 percent, is projected to be more than double the fund’s October estimate, while India is expected to be the world’s fastest-growing major economy this year, with output 7 percent higher in the final quarter of 2023 than a year earlier. Together, China and India will account for half of global growth this year, while the United States and the euro area will account for just 10 percent, the IMF said.

China will be an “engine” that benefits other countries, Gourinchas said.

However, the IMF warned that it remained concerned about the risks in China’s property sector. Beijing has been struggling with a property crisis since 2021, when developer Evergrande defaulted on its international debt.

At the end of the year, the American economy is expected to be 1 percent larger than the previous year, unchanged from October’s forecast. But the IMF says the country’s results in 2022 were stronger than expected.

Gourinchas said there was “a possibility” that a US recession could be avoided, but that this was a “narrow path”, adding that higher interest rates would “certainly cool the economy and bring down inflation”.

The US central bank is expected to raise interest rates by a quarter of a point this week, setting a target range of between 4.5 percent and 4.75 percent.

Tobias Adrian, director of the IMF’s money and capital markets department, warned that interest rates could rise more than markets expect and take longer to come down, especially in the US.

“There is certainly a wedge between what policymakers communicate and what is priced into the markets,” he said. “There is still a lot of upside risk to inflation . . . Until it is absolutely clear that inflation is coming down in a lasting way . . . there is still a need to continue to tighten monetary policy.”

The IMF also reiterated concerns about debt defaults in emerging markets, but played down the risk of a “systemic debt crisis environment”.

Around 60 percent of low-income countries and several emerging economies are at risk of being or are already in need, according to the fund.

Asked about the revival of bailout talks with Pakistan, which saw its growth outlook revised down by 2.5 percentage points to 2 percent for this year, the IMF said it would focus on restoring domestic and external sustainability during a mission to Islamabad this week.