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IMF: Global economy is improving but inflation is still enemy No. 1

<i>CFOTO/Future Publishing/Getty Images</i><br/>Residential and real estate projects under construction in Yantai
CFOTO/Future Publishing/Getty Images
Residential and real estate projects under construction in Yantai

By Alicia Wallace, CNN

Minneapolis (CNN) — The global economy is showing more resilience than economists previously thought — but, although some risks have abated, choppy waters could still be ahead, the International Monetary Fund said Tuesday.

In its latest update to its World Economic Outlook, the agency said it expects global growth of 3% in both 2023 and 2024. The IMF bumped up its 2023 projections by 0.2 percentage points from its previous estimate three months ago and kept the 2024 outlook unchanged.

“Global economic activity has proven resilient in the first quarter of this year, leading to a modest upward revision for global growth in 2023,” Pierre-Olivier Gourinchas, the IMF’s chief economist, said in a statement. “But global growth remains weak by historical standards.”

In April, as turbulence in the banking sector and a growing unease about a potential US debt default roiled markets and unsettled economic outlooks, the IMF downgraded its economic forecasts by one-tenth of a percentage point to 2.8%.

By July, the economic outlook has grown a little brighter: The Covid pandemic is no longer considered a global health crisis, supply chains are flowing more smoothly and economic activity has remained steady amid strong labor markets, the IMF said.

The resolution of the debt ceiling standoff and swift action by regulators to quell banking crises in the United States and Europe helped stem the risks of a broader financial crisis, the IMF said Tuesday, cautioning that “the balance of risks to global growth remains tilted to the downside.”

“Inflation could remain high or increase, for instance from an intensification of Russia’s war in Ukraine or extreme weather-related events,” Gourinchas said. “This could require a further tightening of monetary policy and lead to another bout of financial market volatility.”

The current growth projections of 3%, however, remain below what was achieved pre-pandemic, the agency said. From 2000 to 2019, annual global economic growth averaged 3.8%, according to the IMF. Last year, the world economy grew 3.5%.

Advanced economies continue to serve as the biggest drag on growth, according to the report. In 2023, the US economy is projected to grow by 1.8%, the United Kingdom by 0.4%, and Germany to contract by 0.3%.

When looking across the global economy, there are concerns that China’s recovery could slow further, as its debt-laden real estate sector weighs on growth, according to the report. And there’s also concern that “geoeconomic fragmentation” — where geopolitical ideals could shift economic powers away from globalization and toward a more nationalistic and fractured approach — could disrupt trade, the cross-border movements of money and people and commodity prices.

Still, priority No. 1 is for economies to conquer inflation, Gourinchas said.

“For that, we need monetary policy to remain restrictive until there are clear signs that underlying inflation is cooling,” he said. “In many countries, fiscal policy should tighten to rebuild fiscal buffers and to reinforce the overall credibility of disinflation strategies, with the composition of fiscal adjustment ensuring targeted support for the most vulnerable. Improvements to the supply side of the economy would facilitate fiscal consolidation and a smoother decline of inflation toward target levels.”

He added: “Urgent action is needed to strengthen global cooperation on climate policies, international trade, or debt restructuring, to address common challenges.”

In the United States, the Federal Reserve is meeting this week and expected to raise its benchmark interest rate by another quarter point. Since March 2022, the US central bank has raised rates from effectively zero to above 5% in efforts to tame some of the worst inflation the country has seen since the early 1980s.

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