In its most recent set of assessments, the International Monetary Fund warned that the world’s economy is in a “perilous stage” of low economic growth as well as high financial risk.
This week’s spring meeting of the IMF in Washington saw it downgrade its outlook for global economic growth. It also stated that its medium-term forecast for economic output was at its weakest level since 1990, when the fund started publishing such forecasts.
Pierre-Olivier Gourinchas, the chief economist of the company, said that there were other serious risks.
He stated that “We are… entering an extremely dangerous phase in which economic growth is still low by historical standards, and financial risks have risen. However, inflation has not yet decisively turned a corner.”
“Below the surface,” he said, “turbulence” is building and the situation is very fragile, as recent banking instability has reminded us.
“Inflation is more stubborn than expected even months ago.” Global inflation has fallen, but this is due to a sharp decline in food and energy prices. However, core inflation has not reached its peak in many countries, even excluding volatile energy and food components.
The IMF cut its global economic growth forecast by 0.1 percentage point this year and next to 2.8% and 3.3%, respectively.
The fund stated that the chance of global growth falling below 2 percent this year was 1 in 4. This is a possibility equivalent to a global recession and has happened only five times since 1970, most recently in 2009 and 2020.
Although the UK’s economic growth forecast has been upgraded for this year and next year, it is still expected to be the poorest performing economy in the G7 this fiscal year, shrinking 0.3%. The UK’s gross domestic product will rise to 1% in the next year.
Following the fall of Silicon Valley Bank in America and Credit Suisse in Europe, the fund has issued warnings. These events raise the possibility of more financial turmoil in the future as the system reacts to rising interest rates.
The World Economic Outlook was authored by Mr Gourinchas. He referred to the problems in the UK’s pensions market after last September’s mini budget.
“In both cases, the authorities took swift and strong actions and were able to stop the spread of crisis.” The financial system could be again tested.
These immediate concerns are not the only concern for policymakers, as they meet in Washington to discuss this six-monthly series of meetings. Another worry is that the global economy might have lost its mojo.
This latest forecast shows that the global long-term growth rate has declined. Part of this is due to “benign” factors. Countries like China, who have been driving global growth for over a decade, are now becoming more wealthy nations with a slower growth rate.
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The other concern they have is that the world is starting to deglobalise. Many countries are reducing their supply chains and creating new trade barriers.
These barriers are increasing faster than ever before and could limit global productivity. This could lead to slower long-term growth.
Chancellor Jeremy Hunt responded to the IMF statement by saying:
“Thanks to our efforts, OBR [Office of Budget Responsibility] has declared that the UK will not enter recession and that our IMF growth projections have been raised by more than any other G7 nation.
The IMF has declared that we are on the right path to economic growth. We can more than half the inflation by sticking to our plan, which will ease the pressure on everyone.