According to Pierre-Olivier Gourinchas, chief economist of the IMF, inflation is much more persistent than anticipated.
The world economy is entering a “perilous phase” of low economic growth and high financial risk, the International Monetary Fund has warned in its latest set of assessments.
This week, the IMF, which is conducting its spring meetings in Washington, downgraded its outlook for global growth and stated that its medium-term forecast for economic output is now at its lowest level since the fund began publishing these forecasts in 1990.
However, the company’s chief economist, Pierre-Olivier Gourinchas, added that more severe threats were on the horizon.
He stated, “We are… entering a perilous period in which economic growth remains low by historical standards and financial risks have risen, but inflation has not yet turned the corner decisively.”
“Under the surface, turbulence is escalating, and the situation is quite precarious,” he said.
“Inflation is significantly more persistent than anticipated even a few months ago. While global inflation has decreased, this is primarily due to an abrupt reversal in the prices of energy and food. However, core inflation, excluding the volatile energy and food components, has not yet reached its zenith in many nations.”
The IMF lowered its global economic growth prediction to 2.8% and 3.0%, respectively, due to these issues.
However, the fund said that there was now a one-in-four chance of global growth falling below 2% this year. Something tantamount to a global recession, which has only occurred five times since 1970 (most recently in 2009 and 2020).
The UK’s economic growth forecast for this year and next year has been upgraded. But it is still expected to be the worst-performing G7 economy this year, contracting by 0.3%. Next year, the UK’s gross domestic product is expected to increase by 1%.
The fund’s warnings follow the bankruptcy of Silicon Valley Bank in the United States and Credit Suisse in Europe, events that have increased the likelihood of additional financial turmoil in the coming months as the system adjusts to rising interest rates.
In the World Economic Outlook, Mr. Gourinchas mentioned the difficulties in the UK pensions market following September’s mini-budget, stating, “The financial instability last fall in the gilt market in the United Kingdom and the recent banking turbulence in the United States with the collapse of a few regional banks indicate that significant vulnerabilities exist both among banks and non-bank financial institutions.
“In both instances, authorities acted swiftly and decisively and have thus far been able to contain the crisis’s spread. However, the financial system may be challenged once more.”
In addition to these immediate concerns, the policymakers attending these semiannual meetings in Washington are also concerned that the global economy may have lost some of its dynamism.
According to the most recent forecast, the decline in the long-term global growth rate is attributable in part to “benign” factors, such as the fact that countries like China, which have driven global growth for more than a decade, are becoming higher-income nations with a slowing growth rate.
However, they worry that the globe is deglobalizing, with many nations unravelling their supply chains and installing new trade obstacles.
These hurdles, which are growing faster than ever, may reduce global productivity and long-term development.
In response to the IMF statement, the Chancellor stated:
“Thanks to the measures we have taken, the OBR [Office of Budget Responsibility] predicts that the United Kingdom will avoid recession, and the IMF has upgraded our growth forecasts more than any other G7 nation.
“According to the IMF, we are now on course for economic growth. By sticking to the plan, we will reduce inflation by more than half this year, alleviating the burden on everyone.”
