What we read from the IMF World Economic Outlook Update, July 2023?

26 Jul 2023 , 07:17 AM

The rather curious state of the world economy was summed up in the title of the report update, “Near term resilience, persistent challenges.” That is the reality of the global macro scenario. In the near time, inflation seems to be falling and growth is steadily rising. However, there is still the challenge that too much hawkishness may result in an economic slowdown. Also, the falling inflation in the last few months has been the outcome of gains in food and fuel inflation. Both appear to be reversing. Here is what we carried away from the IMF update to the World Economic Outlook, released on July 24, 2023.

Near term resilience, persistent challenges

This best sums up the situation that exists globally. There are some reasons to be pleased in the immediate term. However, many of the long term challenges that we saw post the pandemic, are still intact and could manifest in different forms in the months to come. Let us look at some of the major takeaways from the IMF update.

• Global GDP growth is expected to  fall from 3.5% in calendar 2022 to 3.0% in calendar 2023 and also in 2024. It is expected that the decision by central banks of the US, EU, and UK to continue hawkish policies for a long time could translate into an economic slowdown and possibly even a recession. Between 2022 and 2023, the advanced economies are expected to see GDP growth falling from 2.7% to 1.5%. On the other hand, the emerging markets are likely to see growth static at 4.0% in 2022 and 2023 with a marginal improvement to 4.1% in 2024. However, Indian GDP is expected to fall from 7.2% in FY23 to just 6.1% in FY24 and bounce to 6.3% in FY25. So, India and China are likely to be the stand-out economies.

   

• Let us turn to the impact on trade on the back of fears of an economic slowdown globally. Growth in the global volume of goods and services trade is expected to fall from 5.2% in 2022 to 2.0% in 2023. However, it is expected to bounce back sharply to 3.7% in 2024. The trade growth for advanced economies is expected to fall from 6.1% to 2.3% while the trade volumes for emerging markets is slated to fall in the same period from 3.7% to 1.5%. Trade is bilateral business and if demand shrinks, then all economies are likely to be hit.

   

• What is the outlook for commodity prices in general and oil prices in particular as per the IMF update? The report expects commodity prices to contract by 21% in 2023 and further by 6.2% in 2024. Even oil prices are expected to contract 4.8% in 2023 and by 1.4% in 2024. The bet appears to be that a slowdown could actually put further pressure on the oil and commodity prices to the extent that the weakness could continue in the year 2024 also. 

   

• What about inflation? That has been showing signs of falling across the globe. However, the IMF update to the World Economic Outlook projects that the fall in inflation will be much sharper for the advanced economies and more tepid for the emerging market economies. For the advanced economies as a whole, consumer price inflation is expected to taper from 7.3% in 2022 to 4.7% in 2023 and further to 2.8% in 2024. However, in the case of emerging markets, the consumer prices are only expected to fall from 9.8% in 2022 to 8.3% in 2023 and further to 6.8% in 2024.

   

• The report has also noted that the quick action taken by the US government on the debt ceiling front has averted an international financial crisis. The banking crisis had a number of casualties including the venerable Credit Suisse. However, in all these cases, the report has emphasised that the quick action by the regulators and the governments ensured that there is no spillover of the toxic effects on other markets and asset classes. However, the IMF has flagged the risk that the recovery in China could be delayed due to its internal problems on the real estate front. 

   

• The IMF update to the World Economic Outlook has specifically pointed out that the nature and colour of inflation differs from one market to another. For example, China has gained from a sharp fall in fuel inflation while food inflation still stays elevated. In the case of India, food inflation appears to the new risk factor on account of an erratic monsoons which oscillated between drought and deluge. The global paradigm is that core inflation (residual inflation excluding food and fuel) has fallen slower than food and fuel. Core inflation tends to be more structural in nature and hence any sustained reduction in headline inflation pre-supposes that core inflation also comes down proportionately. 

   

• The update by the IMF has specifically pointed out that while the stress on the banks in the aftermath of Silicon Valley Bank, Signature Bank and Credit Suisse may have receded, the credit availability still remains very tight. Banks in the US and Europe have sharply restricted access to credit with a fall in corporate loans, real estate loans and even consumer loans. Also, the high frequency data shows that despite signs of recovery, China growth appears to be struggling. They have a much bigger overhang of the real estate crisis that continues to haunt them.

   

• Emerging Asia continues to be significant due to the presence of two large economies viz. China and India. Growth in emerging Asia is expected to bounce to 5.3% in 2023 but then moderate to 5% in 2024. While the forecast for China was kept unchanged, the forecast for India growth in 2023 was raised by 20 basis points. This is largely on the back of domestic investment and the ability of the domestic market in India to drive growth in the months ahead.

   

• Let us spend a moment on core inflation globally. That has been a structural issue and also a sticky candidate. Between 2022 and 2023, global core inflation is likely to fall by just 50 bps from 6.5% to 6.0%. That is still high even in absolute terms. It is likely to fall further to 4.7% in 2024. That means, the supply chain constraints are going to plague the global economy for some more time and headline inflation is not going away in a hurry. Nearly half the economies in the world are expecting flat core inflation and that is not a very encouraging signal.

   

• The IMF has also red-flagged some risk factors for the global economies. For instance, the IMF believes that the institutional set up for inflation could amplify the effects in some countries. Also, Ukraine war could pressure certain agri commodities like food and fertilizers. This is more so with the latest suspension of the Black Sea Grain initiative. The risks of a weak currency in many emerging markets having an impact on imported inflation also cannot be ruled out. Any geopolitical or banking risk could once again lead to a risk of capital towards risk-off avenues creating imbalances in the global market. above all, there is the risk of a China recovery not happening as expected. That could have larger implications on a number of global economies that rely on exports to China.

To sum it up, IMF has stressed that there are some clear policy priorities for economies across the world. Inflation has to be conquered, and there are not two opinions about that. Also, the financial stability also depends on a banking crisis not turning into a contagion. That was well managed in early 2023 but that needs to be sustained. It is essential for economies to rebuild fiscal buffers which they might have lost during the post pandemic effort. Above all, the global economies have the tough task of maintaining banking stability without impacting credit growth. That one is going to give sleepless nights to policy makers.