The International Monetary Fund (IMF) has slashed its global economic growth forecast, warning that the world economy is headed for its weakest expansion since 1990.
According to the latest World Economic Outlook report “Rocky Recovery,” the IMF forecasts that five years from now, global growth is expected to be approximately 3%, which marks the lowest medium-term forecast in over three decades.
The IMF forecast predicts that global output growth will fall from 3.4% in 2022 to 2.8% in 2023, before rising to 3% in 2024, which is a slight change downward from its January projections.
Advanced economies are expected to see an especially pronounced growth slowdown from 2.7% in 2022 to 1.3% in 2023, according to the forecast.
Global headline inflation is set to fall from 8.7% in 2022 to 7% in 2023 on the back of lower commodity prices, but underlying core inflation is proving to be stickier.
Fiscal and Monetary Policies Must Support Global Growth
The IMF’s forecast assumes that recent economic stressors remain contained, but financial markets could suddenly reprice in response to adverse inflation news, while further geopolitical fragmentation could hamper economic progress.
The IMF called for policymakers to take action to address the challenges facing the global economy, including implementing structural reforms to boost productivity, investing in education and training, and ensuring that fiscal and monetary policies are supportive of growth.
The organization’s forecast also highlights the need for international cooperation to address global challenges such as climate change and inequality.
Outlook for Britain Particularly Bleak
The IMF’s latest outlook is not good news for the U.K. – it predicts it will be the worst-performing G7 economy this year, with growth expected to slow to 0.8% in 2023, down from 1.7% in 2022.
The monetary organization predicts that the U.K.’s GDP will grow by just 1.4% in 2023, down from its previous forecast of 1.7%.
This is in stark contrast to the U.S., which is expected to grow by 3.5% in 2023, and Canada, which is expected to grow by 2.5%.
The projected slowdown in growth could also result in higher unemployment, reduced business investment, and lower consumer spending.
The IMF also warned that Britain’s economic recovery could be further hampered by a potential escalation of Russia’s war in Ukraine and tighter global financing costs that could worsen debt distress.
Hunt Believes U.K. Economy Will Outperform
U.K. Chancellor Jeremy Hunt accused the IMF of consistently underestimating Britain’s economy, sending a defiant message to the head of the IMF, whom he met in Washington DC, and insisting that he will “prove the Fund wrong” and that Britain’s economy will outperform, according to Sky News.
Hunt also stated that the Office for Budget Responsibility (OBR), which is the government’s official forecaster, has much more optimistic forecasts than the IMF, and he believes that the OBR’s forecasts are more likely to be accurate.
Despite the IMF’s gloomy outlook, Hunt stated that the fund supports the U.K. government’s economic policies.
He also believes that the British economy will do “significantly better” than the IMF’s forecast.
U.K. Government Action to Stimulate Growth
The IMF forecast is a blow to the British government, which has been touting its economic policies as a success.
The government has been focusing on reducing the deficit and cutting taxes, but the IMF’s report suggests that these policies may not be enough to boost the economy.
The government announced several measures in the last few weeks to help grow the economy amid the grim outlook and the ongoing cost-of-living crisis.
The Spring Budget 2023 introduced the Chancellor’s strategy to deliver long-term sustainable growth, focusing on four key priorities: Employment, Education, Enterprise, and Everywhere.
The government also introduced full expensing for three years from April 2023, allowing companies across the U.K. to write off the full cost of qualifying plant and machinery investment in the year they invest, supporting businesses to invest and grow.
Additionally, the OBR revised its GDP growth forecast upward in the near term – now forecasting that GDP will contract by just 0.2% in 2023, before growing by 1.8% in 2024, 2.5% in 2025, and 2.1% in 2026.
The government also announced a £55 billion ($66 billion) package of tax rises and spending cuts to plug a substantial hole in the country’s public finances and restore its fiscal credibility after a tumultuous year for the British economy.
Additionally, the Bank of England expects slight growth in the second quarter of 2023 after a small contraction in the first three months of the year.
However, despite the government’s efforts, the IMF also warned that the cost-of-living crisis will continue to hit households hard and that inflation, faltering GDP, and rising unemployment are all on the cards for the U.K. in 2023.
Several Key Factors Cited in the Latest Forecast
The IMF noted that disruptions to global supply chains have resulted in higher costs and reduced productivity, which has led to higher inflation and lower GDP growth.
The organization also pointed to other structural factors that are contributing to the slower GDP growth, including aging populations, weak productivity growth, and high levels of debt in many countries – factors that are expected to continue to weigh on economic growth in the years ahead.
Bank Failures Weighing on Global Economy
Needless to say, the banking sector plays a critical role in the economy, and experts warn that the collapse of financial institutions could lead to a loss of consumer confidence and a reduction in lending, which could stunt overall global economic growth.
On May 1, 2023, First Republic Bank, a San Francisco-based lender, collapsed after a six-week spiral.
Regulators seized the troubled bank, and JPMorgan Chase agreed to take over its operations in an effort to prevent contagion that would lead to a wider crisis.
First Republic Bank is the latest major U.S. bank to collapse in recent weeks, following the collapse of Silicon Valley Bank (SVB), Silvergate Capital, and Signature Bank in March.
As one of the largest banks in the U.S. with operations in several countries, the failure of First Republic is a significant event that could have a ripple effect on the global economy.
Impact of the Revised GDP Forecasts
The latest IMF forecast paints a sobering picture of the global economy in 2023, with significant downward revisions to GDP growth forecasts for many countries.
The downward revisions to the GDP growth forecasts underscore the need for continued efforts by policymakers to address the key structural factors that are contributing to the weakening economy.
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