According to a forecast by the International Monetary Fund (IMF), the world economy is only recovering very slowly in view of the ongoing war in Ukraine and high inflation. In Germany, the economy is likely to shrink slightly this year, according to the economic forecast presented on Tuesday. In it, the IMF lowered its global forecast: global growth will slow to 2.8 percent this year compared to 2022 (3.4 percent).
“We are entering a risky phase in which economic growth remains low by historical standards and financial risks have increased without inflation having yet turned significantly,” wrote IMF chief economist Pierre-Olivier Gourinchas.
Tough fight against inflation
The IMF took a positive view of the fact that the economy is slowly recovering from the Russian invasion of Ukraine and is also overcoming the consequences of the pandemic. Central to this are the decline in the “war-related upheavals” in the energy and food markets and the end of the corona lockdown in China. “However, turbulence is building beneath the surface and the situation is quite fragile, as recent instability in the banking sector has shown us,” the report said. The fight against inflation is also much tougher than expected a few months ago. The report sees significant risks that jeopardize an economic recovery.
In January, the IMF was assuming global growth of 2.9 percent – this forecast has now been corrected slightly downwards by 0.1 percentage points. Only in the coming year should things pick up again – the gross domestic product (GDP) should then grow by 3 percent. The economists at the IMF hope that the bottom will be reached this year. It is remarkable that the economy is growing only slowly, especially in the industrialized nations. The IMF has 1.3 percent on the slip for this year. In the emerging and developing countries, on the other hand, things are looking much better at 3.9 percent.
Germany is weakening
The IMF has also revised its forecast downwards for Germany – by 0.2 percentage points compared to January. He now expects economic output to fall by 0.1 percent. The report then predicts growth of 1.1 percent again for 2024. At the beginning of April, leading German economic institutes were somewhat more confident about 2023. In the current year, they are expecting a mini-growth in gross domestic product of 0.3 percent. Back in the fall, they had expected a fall of 0.4 percent and an impending recession.
According to the forecast, there is a global balancing act between restoring price stability and avoiding a slide into recession. However, the IMF is not currently assuming a global downturn. What is worrying, however, is that inflation is falling less than initially predicted. For 2023, the IMF expects inflation to average 7 percent worldwide – 0.4 percentage points more than forecast in January. In the coming year it should then be 4.9 percent (plus 0.6 percentage points). For the industrialized nations, the IMF expects an inflation rate of 4.7 percent this year. These values are still a long way from the target of 2 percent.
There is good news too
According to the report, the strict monetary policy of the central banks is slowly bearing fruit. But now the central banks are unlikely to let up in their fight against high consumer prices. The rate hikes, however, harbor the risk of slowing down the economy. And so the IMF also draws a “plausible alternative scenario”: If the stress in the financial sector persists, global economic growth could fall to 2.5 percent this year – according to the IMF, that would be the weakest growth since the global downturn in 2001 – with exceptions the beginning of the corona pandemic and the financial crisis of 2009. In this scenario, growth in the industrialized nations would be less than one percent.
But the IMF also has good news: On the one hand, there are currently no indications of an uncontrolled wage-price spiral – i.e. the effect that excessively rising wages as a reaction to high inflation are driving prices further up. A “silver lining on the horizon” is also that the turbulence in the banking sector could help slow down demand – and thus have an effect similar to interest rate hikes. In this way, they could help to lower the inflation rate.
