The IMF Upward Growth Revisions: Will the Center Hold?

posted by Karim Pakravan on January 31, 2023 - 4:54pm

Upside economic surprises from the United States and the eurozone have underscored the fact that the global economy has performed better in the fourth quarter of last year (4Q22). The US economy expanded by 2.9% (annualized), while the eurozone avoided a recession, with output expanding by 0.1%, quarter-on quarter. 


At the start of the new year, we are seeing some positive signs as adverse risks have moderated.  First, China has ended its strict COVID lockdown, leading to a strong rebound in consumer spending. Second, mild weather and a major effort to diversify energy sources helped Europe avoid the expected energy price shock.

With these points in mind, the IMF has revised its short and medium-term economic outlook upward, presenting a slightly more optimistic picture of the global economy (“World Economic Outlook”, January 2023, According to the IMF, global output growth should reach 2.9% in 2023, (0.2% higher than in its October forecast), but still below the 3.8% average of 2000-2019.  With the exception of the UK, which is expected to see its economy contract, the major countries and regions should see their economies expanding, albeit at a slower pace than in 2022. In particular, China should experience a rapid rebound, with output increasing by 5.2% in 2023 from 3.0% in 2022.  However, while global inflation is expected to fall somewhat, core inflation should remain elevated.

TABLE 1: IMF Global Forecast –Jan 2023

The improved economic outlook should however be taken cautiously, as major downside risks remain.  Short-term risks include an escalation in the Ukraine war,  a stall in the Chinese recovery and heightened financial markets’ volatility.

Ukraine: In the past few months, oil and food prices have declined despite the dragging out of the Ukraine war. In fact, we have seen some normalization of Ukrainian grain exports.  In a way, while the war has imposed horrendous cost to Ukraine and the Ukrainian people, the world has adjusted itself and has been able to mitigate the downside risks deriving from the conflict.  Yet, most observers expect an escalation of the conflict as both sides prepare to launch major offensives in the coming weeks.

China: while we have seen a renewal of economic activity in China following the removal of the drastic COVID lockdowns, the Chinese consumer remains cautious. Moreover, while China remains the major global manufacturing platform, global supply chains have shifted.  At the same time, a faster pace of Chinese economic recovery will translate into higher oil prices, which could feed into global inflation.

Financial Markets:  The major central banks remain committed to monetary tightening. Paradoxically, the improved economic picture should harden their resolve to bring inflation down further. However, financial markets remain volatile. Should the monetary tightening lead to a recession in major countries, we could expect further turmoil in financial markets, which could impact economic performance in a reverse feedback loop.

FIG.2:  IMF Projections-By Region

As a caveat, we should note that the IMF very rarely projects an economic contraction.  Overall, while the economic skies are clearing, the recovery remains fragile.  In the USA and Europe, we are seeing major economic indicators (in particular PMIs and ISMs) still under water, albeit improving. The U.S. yield curve is still inverted.  The Emerging Markets and Developing Economies (EMDEs) still face stresses. Overall, while the IMF’s positive  perspective is welcome, and we could see a soft landing in the global economy, we should realize that old risks (known knowns) remain and new ones (unknown unknowns, aka black swans) could still emerge.