Global economic growth falls and inflation continues

in the report World economy perspectivespublished this Tuesday, the International Monetary Fund (IMF) reveals that, contrary to what was thought at the beginning of 2023, the world economy will not be able to achieve a stable recovery, with falling inflation and gradual growth, due to the persistence of high inflation and the recent turmoil in the financial sector.

Although inflation has eased as central banks have raised interest rates and lowered food and energy prices, core inflation continues and labor markets remain tight in several major economies.

In fact, the projection for the next five years is around 3% worldwide, which represents the lowest estimate in the medium term since 1990.

Economic growth and inflation

According to the report, the reference forecast is that the Global growth falls from 3.4% in 2022 to 2.8% in 2023 and that it stabilizes at 3% in 2024.

Specific, in Latin America and the Caribbean growth is expected to fall from 4% in 2022 to 1.6% in 2023 and recover to 2.2% in 2024. Spain will experience a particularly pronounced slowdown in growth, from 5.5% in 2022 to 1.5% in 2023 and it will rise to 2% in 2024. However, the forecast for the advanced economies as a whole is from 2.7% in 2022 to 1.3% in 2023.

Likewise, the world headline inflation will fall from 8.7% in 2022 to 7.0% in 2023, due to lower commodity prices, but core inflation is likely to decline more slowly.

On the other hand, the IMF raises a second possible scenario, in which there are greater tensions in the financial sector. In this case, global growth would slow to about 2.5% in 2023, and growth in advanced economies would fall below 1%.

Interest rates and public debt

The natural interest rate is important for both monetary and fiscal policy, as it is a reference level for gauging the monetary policy stance and a key determinant of public debt sustainability.

In this context, the rapid rise in official interest rates has had a chilling effect on the financial sector, since it has exposed vulnerabilities in the banking sector, increasing fears of contagion to financial institutions, whether they are banks or not. As a consequence, politicians have taken strong measures to stabilize the banking system, and financial stability fluctuates according to perceived risks.

At the same time, the other great forces that shaped the world economy in 2022 seem set to continue this year, but with different intensities. Debt levels remain highwhich limits the capacity of fiscal policies to respond to new challenges.

Commodity prices, which rose sharply after Russia’s invasion of Ukraine, have eased, but the war continues and geopolitical tensions are high. Infectious strains of COVID-19 caused widespread outbreaks last year, but hard-hit economies, most notably China, appear to be recovering, easing supply chain disruptions.

Despite the benefits of lower food and energy prices and better supply chain performance, uncertainty continuescaused by the recent turmoil in the financial sector.

reduce inflation

These perspectives reflect the need to policies to reduce inflationand cope with the consequences of the recent deterioration in financial conditions, the war in Ukraine and the increasing geo-economic fragmentation.

According to the IMF, politicians have a narrow way to go to improve the outlook and minimize risks:

• Central banks must stand firm in their tougher anti-inflationary policy
• Fiscal policymakers must support monetary and financial policymakers to bring inflation back to target while maintaining financial stability
• In most cases, governments must try to maintain a general restrictive policy, while providing specific aid to those who are suffering the most from the cost of living crisis.

The Organization anticipates that, once inflation rates return to their targets, interest rates will decline to pre-pandemic levels.

Other measures

On the other hand, the IMF urges the adoption of appropriate fiscal measures, or even restructuring, to sustain the debt in the medium term and to carry out actions to face the structural factors that impede supply and thus increase growth.

Finally, remember that the measures to strengthen the multilateral cooperation they are essential for advancing the creation of a more resilient global economy, for example by strengthening the global financial safety net, mitigating the costs of climate change and reducing the adverse effects of geo-economic fragmentation.