According to the new forecast, the world economy will grow by 2.9 percent this year and 3.1 percent next year.
The world economy growth will slow down this year, but it will already start to ease next year.
The International Monetary Fund (IMF) predicts that the world economy will grow by 2.9 percent this year and 3.1 percent next year.
The forecast published on Tuesday is slightly brighter than the previous one. In October, the IMF estimated that the world economy would grow by 2.7 percent this year.
Historically speaking, economic growth is still weak, as curbing inflation and Russia’s war of aggression in Ukraine are putting a strain on economic activity.
“Despite these headwinds, the outlook is less gloomy than in our October forecast and the current year may become a turning point, when economic growth has bottomed out and inflation is slowing down”, estimates the IMF’s chief economist Pierre-Olivier Gourinchas on his blog.
Central banks The IMF calls for continued tightening of monetary policy where inflation is still high.
For example, monetary policy in the euro area is still supportive, even though the European Central Bank significantly tightened monetary policy last year.
According to the IMF, the real interest rate should be kept at a level that slows down economic growth until core inflation, net of energy and food prices, begins to slow down clearly. In the euro area, core inflation accelerated in December, even though overall inflation slowed to 9.2 percent.
“The new data on inflation are encouraging, but the battle is far from won. Monetary policy has started to bite, as the construction of new apartments slowed down in many countries”, Gourinhas assessed.
By tightening monetary policy, central banks aim to reduce demand to a better balance with supply, which slows down inflation. Tightening usually starts to slow down inflation after half a year and reaches its full effect after more than a year.
For one as a near-term risk, the IMF mentions large salary increases, which may force central banks to tighten monetary policy more than planned.
If companies’ labor costs increase clearly, they have to raise the prices of the goods and services they sell. The result is an acceleration of inflation.
Last in the third quarter of the year, according to the IMF, the world economy showed its resilience against the danger of recession. The labor market was strong and household consumption and corporate investments remained solid.
The removal of the restrictions imposed in China during the worst phase of the coronavirus pandemic will contribute to the rapid recovery of economic activity, the IMF estimates.
The weakening of the US dollar from the peak in November, on the other hand, slightly eases the plight of developing national economies.
The big ones in addition to wage increases, the key risks for a worse-than-forecasted economic development are uncertainty about China’s economic growth due to the increase in coronavirus infections or bigger-than-expected problems in the real estate sector.
In addition, a possible escalation of a war of aggression started by Russia may cause more instability in the energy and food markets. This could increase the fragmentation of the economy into separate groups that would focus on promoting their interests.
According to the IMF, a sudden repricing of securities due to an unfavorable development of inflation may tighten financial conditions, especially in developing economies.
The economy may develop better than predicted if bottlenecks in supply chains ease faster than estimated and the labor market cools due to job losses, in which case the tightening of monetary policy could be slowed down.
Several the IMF considers government actions to curb the effects of inflation to be unsustainable, as they are expensive and can accelerate inflation.
States should rather allow expensive energy prices to reduce demand, so that inflation slows down and fiscal policy does not act in the opposite direction to monetary policy. According to the IMF, energy subsidies and tax reductions should be aimed at those in the weakest position.