IMF slashes growth forecasts for China, euro zone

Robotic arms assemble cars in the production line for Leapmotor’s electric vehicles at a factory in Jinhua, Zhejiang province, China, April 26, 2023. China Daily via REUTERS

MARRAKECH, Morocco  -The International Monetary Fund on Tuesday cut its growth forecasts for China and the euro zone and said overall global growth remained low and uneven despite what it called the “remarkable strength” of the U.S. economy.

In its latest World Economic Outlook, the IMF left its forecast for global real GDP growth in 2023 unchanged at 3 percent but cut its 2024 forecast to 2.9 percent from its July forecast of 3 percent. World output grew 3.5 percent in 2022.

IMF chief economist Pierre-Olivier Gourinchas said the global economy continued to recover from COVID-19, Russia’s invasion of Ukraine and last year’s energy crisis, but that diverging growth trends meant “mediocre” medium-term prospects.

Gourinchas said the forecasts generally pointed to a soft landing, but the IMF remained concerned about risks related to China‘s property crisis, volatile commodity prices, geopolitical fragmentation and a resurgence in inflation.

READ: IMF sees ‘pockets of resilience,’ slowing momentum in global economy

A fresh risk emerged in the form of the Israel-Palestinian conflict just as officials from 190 countries met in Marrakech for the IMF and World Bank annual meetings, but came after the IMF‘s quarterly outlook update was locked down on Sept. 26.

Gourinchas told Reuters it was too early to say how the major escalation would affect the global economy: “Depending how the situation might unfold, there are many very different scenarios that we have not even yet started to explore, so we can’t make any assessment at this point yet.”

READ: Middle East conflict adds new risks to global economic outlook

He said the IMF was monitoring the situation, noting that oil prices had risen some 4 percent in recent days, reflecting concerns that production or transport of oil could be interrupted.

Research by the IMF showed a 10- percent increase in oil prices would dampen global output by about 0.2 percent in the following year and boost global inflation by about 0.4 percent, he said.

Stronger growth is being throttled by the lingering impact of the pandemic, the Ukraine war and increasing fragmentation, along with rising interest rates, extreme weather events and shrinking fiscal support, the IMF said. Total global output in 2023 is slated to be 3.4 percent, or roughly $3.6 trillion – below pre-pandemic projections.

“The global economy is showing resilience. It’s not knocked out by the big shocks it’s experienced in the last two or three years, but it’s not doing too great either,” Gourinchas said in an interview. “We see a global economy that is limping along and it’s not quite sprinting yet.”

The medium-term outlook was “darker” especially for emerging economies, which faced a slower catch-up in living standards and more debt worries, Gourinchas told a news conference.

Even in 2028, the IMF is projecting global growth of just 3.1 percent.

“You have uncertainty. You have geo-economic fragmentation, low productivity growth, and low demographics. You put all these things together and you have a slowdown in medium-term growth,” Gourinchas told Reuters.

Inflation ‘uncomfortably high’

Inflation continued to decline around the globe due to a fall in energy prices and to a lesser extent food prices, but remained too high. It is expected to drop to an annual average of 6.9 percent in 2023 from 8.7 percent in 2022, and to 5.8 percent in 2024.

Core inflation, excluding food and energy, should drop more gradually – to 6.3 percent in 2023 from 6.4 percent in 2022, and to 5.3 percent in 2024 – given tight labor markets and stickier-than-expected services inflation, the IMF said.

“Inflation remains uncomfortably high,” Gourinchas said, warning: “Central banks … must avoid a premature easing.”

Labor markets were buoyant and unemployment rates low in most advanced economies, but there was not much evidence of a wage-price inflation spiral, even with a major strike by U.S. autoworkers in the United States.

“We’re not seeing strong signs of an out-of-control sequence of wages chasing prices and prices chasing wages,” he told Reuters.

The IMF said uncertainty had narrowed since its April forecasts, but there were still more downside than upside risks for 2024. The chance of growth falling below 2 percent – which has only occurred five times since 1970 – was now seen at 15 percent, compared with 25 percent in April.

The IMF noted that investment was uniformly lower than before the pandemic, with businesses showing less appetite for expansion and risk-taking given higher interest rates, stricter lending conditions and less fiscal support.

Gourinchas said the fund was also advising countries to rebuild thin fiscal buffers against future shocks, noting that a substantial deterioration in fiscal deficits in the United States was “most worrying.”

US growth pre-pandemic forecasts 

The IMF raised its forecast for U.S. growth by 0.3 percentage points to 2.1 percent for 2023, and by 0.5 percentage point to 1.5 percent for next year, citing stronger business investment and growing consumption. That makes the United States the only major economy to beat pre-pandemic forecasts.

China was forecast to grow 5 percent in 2023 but slow to 4.2 percent in 2024, 0.2 and 0.3 percentage points less than previously expected, due to a property crisis and weak external demand.

If the real estate crisis deepened, China‘s growth could be lowered by as much as 1.6 percent percentage point, which in turn would knock 0.6 percentage points off global growth, Gourinchas said.

Unless China takes “forceful action” to clean up the real estate sector, the “problem could fester and become worse.”

The IMF cut its estimates for euro zone growth to 0.7 percent in 2023 and 1.2 percent in 2024, from July forecasts of 0.9 percent and 1.5 percent.

The UK, also hit hard by high energy prices, saw its growth forecast raised by 0.1 percentage point to 0.5 percent for 2023, but cut by 0.4 percentage point to 0.6 percent for 2024.

Japan is expected to grow 2 percent in 2023, a 0.6 percentage point upward revision, buoyed by pent-up demand, a surge in inbound tourism, its accommodative monetary policy and a rebound in auto exports, the IMF said. It left Japan’s 2024 growth outlook unchanged at 1 percent.