Portugal Colonial - IMF lifts 2023 growth forecast with boost from China reopening

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Global growth is set to be higher than expected this year, the IMF said Monday, raising its forecast on surprisingly strong consumption and investment while China's lifting of zero-Covid restrictions provides another boost.

World growth has been bogged down by fallout from Russia's invasion of Ukraine last year, economic downturns and efforts to rein in spiraling costs of living.

Against this backdrop, the International Monetary Fund expects the global economy to expand 2.9 percent this year, slowing from 2022 to a rate that remains weak by historical standards.

But "adverse risks have moderated" since last October's forecast, said the IMF in the latest update to its World Economic Outlook report.

"The year ahead will still be challenging... but it could well represent a turning point with growth bottoming out and inflation declining," IMF chief economist Pierre-Olivier Gourinchas told reporters.

In particular, the IMF sees Germany and Italy avoiding recessions this year, shifting from earlier predictions, as European growth proved "more resilient than expected" despite shocks from war in Ukraine.

And the fund does not expect global GDP to shrink, with Gourinchas noting "we're well away from any sort of global recession marker."

While the outlook has not worsened this time around, there are still challenges to overcome to reach sustainable recovery, he said.

- Surprising resilience -

Most advanced economies are expected to slow this year, driving the global growth decline, said the IMF. Yet, many countries have shown surprising resilience.

"The forecast of low growth in 2023 reflects the rise in central bank rates to fight inflation -- especially in advanced economies -- as well as the war in Ukraine," the IMF said.

But although US growth is projected to fall to 1.4 percent in 2023 and euro area growth is set to slump to 0.7 percent, both figures reflect upward revisions from last October.

"Economic growth proved surprisingly resilient in the third quarter of last year, with strong labor markets, robust household consumption, and also business investment," said Gourinchas.

Countries adapted better than expected to the energy crisis in Europe too, he added, with the region seeing lower-than-anticipated gas prices and having enough resources to make shortages unlikely this winter.

Inflation has shown signs of decreasing globally as well, and China's reopening holds the promise of a rapid rebound in the country's economic activity, Gourinchas said.

The world's second-biggest economy has in the past contributed up to 40 percent of global growth, IMF chief Kristalina Georgieva previously noted.

This year, its growth is pegged at 5.2 percent -- 0.8 points more than earlier expected -- on "rapidly improving mobility" after it abruptly ended its zero-Covid policy in December.

But the United Kingdom saw a significant downgrade to its growth forecast, and is now seen to contract 0.6 percent this year.

This comes as high energy prices hurt households and businesses, while tighter monetary policy weighs on economic activity.

- 'Not yet won' -

Despite a rosier outlook, the IMF warned of numerous risks on the horizon.

An escalation of war in Ukraine could impact food and energy prices, and China's recovery might stall on a deepening real estate crisis or severe Covid outbreaks -- due to low population immunity and insufficient hospital capacity.

Stubborn inflation could also prompt further tightening by central banks and hold back business activity as borrowing costs rise.

"The fight against inflation is not yet won," Gourinchas said.

Overall inflation may have peaked, but the "core" calculation which strips out the volatile food and energy components remains well above pre-pandemic levels in most economies.

Even as tighter monetary policy starts to cool demand and lower inflation, the IMF warned its "full impact is unlikely to be realized before 2024."

There could be favorable surprises, such as if consumption remains solid or inflation falls without sparking a rise in unemployment.

But Gourinchas cautioned it is "premature to put too much weight on that sort of benign scenario" where prices cool on their own.

P.Sousa--PC