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Although inflation has declined as central banks have raised interest rates and food and energy prices have come down, underlying price pressures are proving sticky, with labour markets tight in a number of economies, it says.
The war in Ukraine could intensify and lead to more food and energy price spikes, pushing inflation up. Core inflation could turn out more persistent than anticipated, requiring even more monetary tightening to tame, it notes.
Side effects from the fast rise in policy rates are becoming apparent, as banking sector vulnerabilities have come into focus and fears of contagion have risen across the broader financial sector, including non-banking financial institutions. Policymakers have taken forceful actions to stabilise the banking system, the report notes.
Other major forces that shaped the world economy in 2022 seem set to continue into this year, but with changed intensities, it says.
Debt levels remain high, limiting the ability of fiscal policymakers to respond to new challenges. Commodity prices that rose sharply following Russia’s invasion of Ukraine have moderated, but the war continues, and geopolitical tensions are high.
Infectious COVID-19 strains caused widespread outbreaks last year, but economies that were hit hard—most notably China—appear to be recovering, easing supply-chain disruptions, it says.
The baseline forecast, which assumes that the recent financial sector stresses are contained, is for growth to fall from 3.4 per cent in 2022 to 2.8 per cent in 2023, before rising slowly and settling at 3 per cent five years out––the lowest medium-term forecast in decades.
Advanced economies are expected to see an especially pronounced growth slowdown, from 2.7 per cent in 2022 to 1.3 per cent in 2023.
In a plausible alternative scenario with further financial sector stress, global growth declines to about 2.5 per cent in 2023––the weakest growth since the global downturn of 2001, barring the initial COVID-19 crisis in 2020 and during the global financial crisis in 2009––with advanced economy growth falling below 1 per cent.
Global headline inflation is set to fall from 8.7 per cent in 2022 to 7 per cent in 2023 on the back of lower commodity prices, but underlying (core) inflation is likely to decline more slowly. Inflation’s return to target is unlikely before 2025 in most cases, the IMF report says.
Fragmentation into geopolitical blocs has the scope to generate large output losses, including through its effects on foreign direct investment, it adds.
Fibre2Fashion News Desk (DS)