IMF has noted that the current outlook for emerging markets and developing economies for 2023-24 is moderately stable
In its recent World Economic Outlook, the International Monetary Fund (IMF) increased the global growth estimates for 2023. This minor change in stance was based on the latest strength in economic activity during the first quarter. It also warned that the ongoing struggles are worrisome considering the medium-term outlook.
They said inflation is slightly cooling and the pressure on the struggling banking sector has decreased substantially. But the foreseeable risks for the global economy are persistent with a tight credit market. They have improved their estimates for the global real GDP growth from their April estimates of 2.8%, bringing it up to 3% in 2023, which is the same forecast done for the next year.
Pierre-Olivier Gourinchas, the chief economist at IMF, said that they are on track but not yet out of the woods. He pointed out that the latest forecast upgrade was due to healthy first-quarter results. He added that when they look 5 years down the line, the figure comes near to 3% or slightly above 3%. This represents a major decrease in growth in comparison to the time before covid pandemic.
Another interesting dimension was the factoring of the old-age veteran workforce. Developed countries like Japan, Germany, and China have a significant chunk of the workforce that is quite old for working. Although newer technologies can enhance product quality and work productivity, they can prove to be a fatal blow to the working class.
IMF has noted that the current outlook for emerging markets and developing economies for 2023-24 is moderately stable. The estimated growth for the current year is 4%and 4.1% for the next year. It has warned that the lack of credit in the market still exists with a risk of debt distress that can spread widely to developing and emerging economies in unfortunate circumstances.
The IMF has highlighted that problems from the previous year have not been solved, which hinders the current year’s growth. The sky-high inflation is depleting purchasing power of domestic households, and interest rates touching decadal highs have increased the cost of borrowing and created a shortage of credit facilities owing to the banking crisis earlier in March.
Inflation
The global lender has estimated that the global headline inflation would decrease from 8.7% in 2022 to 6.8% in 2023 and further decline to 5.2% in 2024. They pointed out that the core inflation would decrease from 6.5% in 2022 to 6% in 2023 and, later on, to 4.7% in 2024.
The IMF warned that the ongoing conflict between Russia and Ukraine could further increase inflation. A recent withdrawal of Russia from the Black Sea grain initiative can shoot up food prices. An increase in El Nino’s weather activity can raise commodity prices and impact seafood rates.
The IMF has revised its outlook on the most developed economy of the world, the United States. It had earlier predicted a growth of 1.6% in April when the labour market was flourishing, and now it has been 1.8% in the current year. The IMF said that global trade growth would primarily decline to 2% this year and rise later to 3.7% the next year.
The IMF has also forecasted China’s growth, which happens to be the second largest economy in the world; its prediction has remained stable at 5.2% in 2023 ad 4.5% in 2024. It cited that the Chinese real estate sector is still depressed, which is delaying the recovery of the overall economy.
The outlook for European countries has been upgraded to 0.9% in 2023 and 1.5% in 2024. Japanese growth rose by 0.1% to 1.4% in 2023, and the estimates for 2024 were left untouched at 1%.
Rising interest rates
Central banks all over the world raising rates to control inflation has become a hindrance to growth and is heavily impacting trading activities. The central banks are primarily concerned with bringing down inflation, improving risk management, and administrative regulation.
Gourinchas said that they need to be attentive even to minor changes that can affect their financial health because, in such a stressed environment, any negative shock can tremble the whole ecosystem. He noted that quantitative tightening of fiscal policies by central banks could negatively impact emerging and developing economies.
The IMF has cited that unpleasant inflation data can raise market expectations in regard to interest rates, leading to a further contraction of financial activity. This might again stress the worsening banking sector, especially the ones exposed to commercial real estate.