The International Monetary Fund has indicated that global economy continues to gradually recover from the pandemic and Russia’s invasion of Ukraine.

In the near term, the signs of progress are undeniable, it stated in its July 2023 World Economic Outlook Report.

“The COVID-19 health crisis is officially over, and supply-chain disruptions have returned to pre-pandemic levels. Economic activity in the first quarter of the year proved resilient, despite the challenging environment, amid surprisingly strong labor markets. Energy and food prices have come down sharply from their war-induced peaks, allowing global inflation pressures to ease faster than expected. And financial instability following the March banking turmoil remains contained thanks to forceful action by the US and Swiss authorities”.

Yet many challenges, it said, still cloud the horizon, and it is too early to celebrate.

Under the Fund’s baseline forecast growth will slow from last year’s 3.5% to 3% this year and next, a 0.2 percentage points upgrade for 2023 from its April projections.

Global inflation is also projected to decline from 8.7% last year to 6.8% this year, a 0.2 percentage point downward revision, and 5.2% in 2024.

The slowdown is concentrated in advanced economies, where growth will fall from 2.7% in 2022 to 1.5% this year and remain subdued at 1.4% next year.

The euro area, still reeling from last year’s sharp spike in gas prices caused by the war, is set to decelerate sharply.

By contrast, growth in emerging markets and developing economies is still expected to pick-up with year-on-year growth accelerating from 3.1% in 2022 to 4.1 percent this year and next.

Risks

The IMF said stronger growth and lower inflation than expected are welcome news, suggesting the global economy is headed in the right direction.

Yet, it pointed out that while some adverse risks have moderated, the balance remains tilted to the downside.

“First, signs are growing that global activity is losing momentum. The global tightening of monetary policy has brought policy rates into contractionary territory. This has started to weigh on activity, slowing the growth of credit to the non-financial sector, increasing households’ and firms’ interest payments, and putting pressure on real estate markets”.

In the United States, the IMF said excess savings from the pandemic-related transfers, which helped households weather the cost-of-living crisis and tighter credit conditions, are all but depleted.

In China, the recovery following the re-opening of its economy shows signs of losing steam amid continued concerns about the property sector, with implications for the global economy.

“Second, core inflation, which excludes energy and food prices, remains well above central banks’ targets, and is expected to decline gradually from 6 percent this year to 4.7% in 2024, a 0.4 percentage points upward revision.”

More worrisome, the Fund said core inflation in advanced economies is expected to remain unchanged at a 5.1% annual average rate this year, before declining to 3.1% in 2024. Clearly, the battle against inflation is not yet won.