Economic Resilience Tempered By Persistent Challenges

The International Monetary Fund’s (IMF) latest World Economic Outlook (WEO) update in July paints a picture of near-term resilience amid persistent challenges for the global economy. Global growth is projected to decelerate from 3.5 percent in 2022 to 3.0 percent in both 2023 and 2024, an improvement of 0.2 percentage point for 2023 compared with previous projections but still below the historical average.

Advanced economies have been the main drivers of this decline, with weaker manufacturing and other idiosyncratic factors offsetting stronger services activity. Meanwhile, emerging market and developing economies are expected to maintain a broadly stable growth outlook, although regional variations are evident.

But despite the resilience in some sectors, the overall global growth trajectory remains below pre-pandemic levels. World trade growth is expected to experience a similar pattern, declining from 5.2 percent in 2022 to 2.0 percent in 2023, before rising to 3.7 percent in 2024. This slowdown in trade growth is attributed to shifts in global demand, a shift toward domestic services, and the lingering effects of US dollar appreciation, which have imposed barriers to trade.

Pierre-Olivier Gourinchas, economic counsellor and director of research of the IMF, said: “The global economy continues to gradually recover from the pandemic and Russia’s invasion of Ukraine. In the near term, the signs of progress are undeniable. Yet many challenges still cloud the horizon, and it is too early to celebrate.
“Stronger growth and lower inflation than expected are welcome news, suggesting the global economy is headed in the right direction. Yet, while some adverse risks have moderated, the balance remains tilted to the downside.”

Mixed outlook

The global recovery from the Covid-19 pandemic and geopolitical tensions resulting from Russia’s invasion of Ukraine are contributing to a mixed economic landscape. Supply chains have largely recovered, and shipping costs and delivery times are back to pre-pandemic levels. However, some challenges from 2022 persist, such as high inflation and its effects on household purchasing power. Central banks have responded to inflationary pressures with policy tightening, leading to higher borrowing costs that restrain economic activity.

“Hopefully, with inflation starting to recede, we have entered the final stage of the inflationary cycle that started in 2021. But hope is not a policy, and the touchdown may prove quite tricky to execute. Risks to inflation are now more balanced and most major economies are less likely to need additional outsized increases in policy rates,” Gourinchas said.

The banking sector has experienced stress, although measures taken by authorities have contained potential crises. Nonetheless, access to credit remains tight, impacting economic activity, particularly in emerging market and developing economies. Public finances are strained in low-income countries, limiting their capacity for priority investments.

The services sector has demonstrated resilience in the first quarter of 2023, driving economic activity in advanced economies and some emerging markets. However, nonservices sectors, including manufacturing, have shown weakness, leading to a broader slowdown in economic activity. Heightened uncertainties about the geoeconomic landscape, weak productivity growth, and tighter financial conditions have prompted firms to scale back investment.

Regionally, China’s recovery, though initially strong in manufacturing and services, is now losing steam due to weaknesses in the real estate sector, limited foreign demand, and labour market challenges.

In the US, growth has remained robust in the first quarter, supported by a tight labour market, but it is expected to slow down as consumers exhaust their excess pandemic savings, and the Federal Reserve implements further rate hikes.

“Going forward, there is a danger of a sharp repricing—should inflation surprise to the upside or global risk appetite deteriorate—causing a flight toward dollar safe assets, higher borrowing costs and increased debt distress,” Gourinchas said.

The euro area is experiencing divergent growth patterns across countries, with stronger services and tourism boosting growth in Italy and Spain, while weakness in manufacturing drags down Germany’s growth. In the UK, falling energy prices, post-Brexit confidence, and a resilient financial sector have led to an upward revision in growth for 2023.

Emerging and developing economies

The growth outlook for emerging market and developing economies is broadly stable, with an average projected growth rate of 4.0 percent in 2023 and 4.1 percent in 2024. However, there are divergences within this group, with about 61 percent of economies expected to grow faster in 2023 and others, including low-income countries, growing more slowly.

Asia’s emerging and developing economies are leading the growth trajectory, with China projected to maintain its growth rate in 2023 and 2024, supported by consumption and net exports. India’s growth has been revised upward due to strong domestic investment. Europe’s emerging and developing economies, particularly Russia, are expected to experience moderate growth. Latin America and the Caribbean are witnessing a slowdown in 2023 compared with the rapid growth seen in 2022, with Brazil and Mexico showing varying trends. The Middle East and Central Asia face a decline in growth, notably in Saudi Arabia due to production cuts, while sub-Saharan Africa’s growth is projected to pick up after a decline in 2023.

Meanwhile, the fight against inflation continues, with inflation rates easing in most countries but remaining high. Core inflation remains above central banks’ targets in many economies due to past shocks, strong wage growth, and tight labour markets. Major central banks have indicated a need for further monetary policy tightening to address this issue.

“These labour market developments matter enormously,” Gourinchas said. “In the near term, should economic conditions deteriorate, the risk is that firms might reverse course and sharply scale down employment. Separately, the strong recovery in employment, coupled with only modest increases in output, indicates that labour productivity—the amount of output per hour worked—has declined. Should this trend persist, this would not bode well for medium-term growth.”
Source: The Baltic Exchange

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