The International Monetary Fund does not see the situation as black. Does it expect a recession this year?
The eyes of all investors are currently on various reports and analysts' expectations for 2023. There are still some risks, but at the same time recent events have given a chance for improvement. So let's take a look at the International Monetary Fund's outlook for 2023.
Last year was not an easy one for investors, and most people believe that this year might not be any different. But as the year drew to a close, certain events happened that could boost the economy. After all, this is what the International Monetary Fund summarises in its report. So let's take a look at their outlook for 2023. Compared to the end of last year, the IMF is more optimistic about 2023.
So first we'll look at what you might be most interested in, and that's inflation. The IMF report shows that global inflation peaked sometime in Q3 of last year. According to the IMF, global inflation is expected to fall from 8.8% in 2022 to 6.6% in 2023 and 4.3% in 2024.
The next thing is to fight this inflation. The IMF attributes the reversal of the downward trend in inflation to the cooling of economies through central bank monetary policy. Another thing that has contributed to the decline is the cooling of commodity markets, such as oil or natural gas, in some economies and countries. According to the IMF, we are now on the right trajectory in terms of inflation. There could be a tipping point in 2023 when inflation growth bottoms out and inflation starts to fall.
We have had some good news, but it is too early to really declare victory.
There is, after all, one thing the IMF is worried about. IMF chief economist Pierre-Olivier Gourinchas warns that rising input costs from energy prices or wage growth could push inflation higher again. And with core inflation still higher than most central banks' target, the IMF doesn't think global central banks are done raising interest rates.
So the next thing we'll focus on here is the global recession. The IMF sees this situation very positively, and says that the global economy has been very strong and resilient over the past year. Be it the job market, consumer spending, or even business investment. In many economies, these factors have even been stronger than expected.
Around the world, you see labour markets that have been quite resilient; household consumption that has been stronger than expected; and business investment. When you put it all together, you have a slightly more resilient global economy.
According to the IMF's chief economist, there is unlikely to be a global recession this year, but we are still not out of the woods. There are a lot of pressures on the global economy, whether it's inflation or the war in Ukraine, for example, or high interest rates that are cooling the economy. For these reasons, the IMF expects global economic growth to slow to 2.9% in 2023.
Possible salvation for the global economy
One factor that could have a positive impact on the global economy in 2023, according to the IMF, is China's reopening to the world. By reopening China, the Chinese economy is slowly recovering and is starting to get back on track. China's reopening will mean an increase in demand in many sectors, and a partial improvement in production and supply chains.
But China is still not out of the woods. Given the population's low immunity to COVID 19, and inadequate hospital capacity, especially outside major cities, China's economic recovery may be prolonged.
The US economy
What will probably be of most interest to us is the US economy, about which the IMF is relatively optimistic, even more so than the Fed. Indeed, the Fed expects US GDP growth of only 0.5%, while the IMF is far more optimistic in this regard, expecting US GDP growth of 1.4% for this year.
According to the chief economist, while we are starting to see the first signs of layoffs outside the tech sector, the US labor market is still strong. According to the IMF, the Fed will cool the economy by raising interest rates until 2024. Thus, the IMF expects the unemployment rate to be roughly slightly above 5% in 2024. According to the IMF's chief economist, rising unemployment does not necessarily coincide with a recession. He therefore assumes that it is possible that the US will experience a so-called shallow landing this year.
We still believe there is a narrow path to avoid a recession this year, but it is a narrow path and there could be a recession if further tightening is needed or if there are further adverse shocks.
According to the IMF, the main issue in the US at the moment is the question of raising the debt ceiling. This may be one of the shocks to the US economy. As the Fed raises rates, albeit at a slower pace, and continues to expand its balance sheet, House Republicans using the debt ceiling as a bargaining tool for spending cuts could risk adverse liquidity in the US Treasury market.
I think that would be a huge blow to the US economy, to the global economy and to the US government bond market, which is one of the pillars of the international financial system. It is certainly something that would threaten stability. We strongly urge all parties to reach an agreement on this matter to avoid a negative outcome.
Negotiations on raising the debt ceiling are the number one issue in America at the moment. If only for the reasons mentioned above, but also because, even if the Democrats and Republicans were to reach an agreement, there would probably be spending cuts as part of the deal, which could hit the US economy hard.
In summary, then, the IMF does not currently see the situation as entirely pessimistic. Yes, it expects a slowdown in the growth of the global economy, but that is likely to come whether we want it to or not. By all accounts, the global economy appears to be relatively strong. However, there are still many unresolved issues, such as the war in Ukraine, high interest rates, and possibly the resolution of the debt ceiling in the US. It is therefore a question of how long the economy can endure, and withstand, these pressures.
WARNING: I am not a financial advisor, and this material does not serve as a financial or investment recommendation. The content of this material is purely informational.