IMF's World Economic Outlook projects soft landing even as global economy is ‘limping along’

The International Monetary Fund (IMF) released the World Economic Outlook – October 2023, with a focus on the continued risks of inflation, analysis of and next steps for global monetary policy, and the threat of deeper fragmentation to commodity supply chains.

The official presentation by the international body included remarks by Pierre-Olivier Gourinchas, Director, Research Department; Petya Koeva Brooks, Deputy Director, Research Department; and Daniel Leigh, Division Chief, Research Department, with the discussion being moderated by Jose Luis De Haro, Communications Officer of the IMF.

Global projections

The report noted that global growth though resilient in the aftermath of the pandemic and the outbreak of the Russia-Ukraine war, has remained relatively slow and unevenly distributed.

In his remarks, Gourinchas noted that the global economy is,

…limping along, not sprinting.

In its latest projections, the IMF anticipates global growth for 2023 to come in at 3.0%, while next year will likely see a decline to 2.9%, a downward revision of 0.1% from the previous report, and well below historical averages.

However, as mentioned earlier, this is unevenly distributed.

Advanced economies

The advanced economies are navigating difficult headwinds, with aggregate growth for this year expected to be 1.5% and to slow to 1.4% in the following year.

While the growth projections for the United States have been revised upwards (to 1.5% in 2024) on the back of a resilient consumer and stronger-than-anticipated labour market, the EU has seen a downward revision (to 0.7% in 2023 and 1.2% in 2024) following aggressive monetary policy and the ongoing energy crisis.

The largest economy in Europe, Germany, is projected to contract this year by 0.5% while returning to growth in 2024 at 0.9%.

Emerging markets

Emerging markets and developing economies are expected to maintain growth at over 4%, although China’s outlook has deteriorated largely due to the stress in the property sector and other macroeconomic headwinds.

China’s hard crash in investments and consumer confidence is a major threat to the country’s prospects.

Accordingly, the IMF projects Chinese growth at 3.0%, 5.0%, and to slow to 4.2% in 2022, 2023, and 2024, respectively.

During the same periods, India’s projections have been revised higher to 7.2%, 6.3%, and 6.3%, respectively.

Brazil’s outlook too has seen an upward revision and is expected to grow at 2.9%, 3.1%, and 1.5%, respectively.

Russia is projected to bounce back from a contraction of 2.1% in 2022 to 2.2% in 2023 before moderating to 1.1% in 2024.

Medium-term projections

Since the onset of the global financial crisis, the medium-term growth projections have weakened substantially for developing economies.

As a result, the growth trajectories of these countries are expected to continue to decline, stalling convergence with advanced economies.

The IMF notes that this situation would demand comprehensive and well-targeted reforms particularly in governance and in strengthening exposure to the external sector.

Extreme risks

As per Gourinchas, the worsening real estate crisis in China, disruption and fragmentation in global commodity value chains, elevated food prices, and the crisis in access to minerals are significant risks facing the global economy today.

Fragmentation in commodities markets

The volatile geopolitical climate led to an approximately 27% increase in oil prices between June-September 2023, ahead of the recent decline.

However, as was discussed in this earlier piece, the instability in the Middle East and the potential of a fallout between the US and Iran could drive energy costs significantly higher.

The authors of the IMF’s latest report acknowledged that persistent conflicts and geopolitical stresses could prove to be a major risk and result in,

…more severe fragmentation of commodity trade…

Signs of such fragmentation in the commodities markets are becoming more apparent given the moderation in FDI flows and trade restrictions, as shown in the image above.

With many countries, particularly among developing economies being highly reliant on only one to three suppliers for crucial commodity inputs, deeper fragmentation could have severe consequences on inflation, food security, social cohesion, and national security in these countries.

Inflation

Gourinchas noted that inflation remains far too high, despite the significant declines since 2022.

The IMF expects core inflation to decline to below target for most countries by 2025.

However, price stability is challenged by elevated near-term inflation expectations, which in remain above target across several countries.

Inflationary factors shall continue to be a concern given the high onboarding of public debt by governments since the pandemic, particularly in the case of the United States.

Even so, financial conditions have continued to loosen despite higher-for-longer rates, which could also impact price stability.

Revisiting the above section on commodities and the threat to agricultural security, the inflation basket in developing countries often comprises primarily of food items.

As noted in this piece, several developing countries could have over 40% of their piece index dedicated to food.

Consequently, such countries can be highly susceptible to surging headline inflation, on account of food shortages.

Soft landing and key policy recommendations 

On a positive note, the IMF anticipates that a soft-landing scenario could play out, particularly as consumption in the United States has remained robust, and the labour market is projected to show limited deterioration until 2025 (when inflation is expected to return to 2% levels).

In terms of broad policy recommendations, the panel touched upon the need for countries to engage in multilateral collaboration and follow WTO rules to promote sound trade practices, and safeguard the flow of critical minerals that are needed for decarbonization via dedicated ‘green corridors’ and agricultural output via ‘food corridors’.

The IMF’s report notes that these corridors may be somewhat simpler to implement since they can focus on a subset of the most crucial commodities.

These corridors may be designed to secure access to key commodities across countries, advancing food security and combating worsening climate change, despite the higher likelihood of more frequent supply shocks.

In addition, the IMF hopes that member countries will continue to work towards limiting geo-economic confrontation that may injure global prosperity and future prospects.