The International Monetary Fund warns of increased threats to the economy

The world economy grows steadily, but increased risks overshadow the near-term outlook, estimates the International Monetary Fund (IMF) in its business cycle forecast published on Tuesday.

Chief Economist Pierre-Olivier Gourinchas considers the increase in consumer prices, i.e. the slowdown in inflation, particularly positive. It contributes to the easing of monetary policy, which is apt to increase household consumption and business investments.

“It seems that the global fight against inflation has been largely won, although price pressures persist in some countries,” Gourinchas writes in his blog.

In his opinion, the world economy has withstood exceptionally well the fact that in many countries the central banks had to tighten monetary policy very strongly in order to tame inflation.

“The slowing down of inflation without a global recession is a great achievement”, Gourinchas assesses.

Fast inflation typically causes the most difficulties for low-income earners, whose income is mostly spent on necessities. Rapid inflation is also harmful to companies.

According to the IMF, the slowdown in inflation is mainly explained by the easing of supply disturbances and the increase in the supply of labor, which, according to it, is often due to increased immigration.

“Monetary policy played a decisive role when it kept inflation expectations anchored and managed to avoid the price-wage cycle and the disastrous inflation of the 1970s.”

At the center of the price-wage spiral are large wage increases.

When inflation accelerates strongly, employees usually start demanding bigger and bigger wage increases. Due to increased labor costs, companies have to raise the prices of their products, which accelerates inflation even more.

IMF predicts that the world economy will grow by 3.2 percent next year, which would be the same as this year. In the United States, economic growth slows down, but still remains clearly stronger than in the euro area.

The IMF estimates that the economy of the euro area will grow by 1.2 percent next year. It would be 0.3 percentage points less than in the previous forecast published in July.

The IMF’s view of the Finnish economy is, on the other hand, rather bright. It predicts that the economy will grow by 2.0 percent next year. As a result, according to the IMF, the unemployment rate will decrease to 7.4% next year from 8.3% this year.

The world economy the downside of stabilization is increased risks. The near-term outlook is weakened by the potential escalation of the conflict in the Middle East, as it could cause serious risks to the raw material market.

In addition, the IMF warns against unwanted trade and industrial policies, i.e. states’ efforts to emphasize their own interests, because in the worst case it can significantly slow down international economic growth.

“Due to growing external competition and structural weaknesses in production and productivity, many countries are implementing industrial and trade policy measures to protect domestic workers and industry,” Gourinchas assesses.

Industrial and trade policy can sometimes increase investments and boost economic activity in the short term, especially if debt-financed subsidies are used. However, the IMF emphasizes that such industrial and trade policies often lead to retaliation and do not permanently improve living standards.

In the third in the threat scenario, central banks keep monetary policy too tight for too long. That is why the IMF considers the easing of monetary policy to be mostly justified.

“Lower interest rates in major economies will reduce pressure on advanced economies as their currencies strengthen against the US dollar and financial conditions improve.”

This slows down the increase in the price of imported products and contributes to the suppression of inflation.

“Lower interest rates in major economies will reduce pressure on emerging market economies as their currencies strengthen against the US dollar and financial conditions improve.”

However, the world has changed: due to climate change, public health problems and geopolitical tensions, supply disruptions threaten to become permanent.

“It is always more difficult for monetary policy to contain inflation in the face of shocks that simultaneously raise prices and reduce production,” Gourichas assesses.