The International Monetary Fund inched up its outlook for global growth this year, reflecting greater-than-expected resilience in economies across the world while striking a more optimistic tone than in reports last year.
The IMF now sees global growth for 2023 reaching 2.9%, 0.2% higher than its previous forecast published in October.
"We've seen a lot of resilience in a number of economies throughout 2022, despite the really severe shocks, the cost of living crisis, the energy crisis, that has happened as a consequence of the pandemic, and then the Russian invasion of Ukraine," IMF Chief Economist, Pierre-Olivier Gourinchas, told Yahoo Finance.
"Around the world, you see labor markets that have been quite resilient; household consumption that has been stronger than expected and business investment. You put all this together, and you have a slightly more resilient global economy. We're expecting things to bottom out."
The IMF is not expecting a global recession this year, but cautions the balance of risks for the global outlook remain to the downside with the possibility of lower growth and higher inflation. The IMF's latest forecast would also still mark a slowdown from the 3.4% growth seen in 2022, as higher interest rates and Russia’s war in Ukraine continue to weigh on the world economy.
The international body said global headline inflation appears to have peaked in the third quarter last year. Still, underlying core inflation, which strips out volatile food and energy prices, has not yet peaked in most economies and remains well above pre-pandemic levels.
Global inflation is set to fall from 8.8% in 2022 to 6.6% this year and 4.3% in 2024; pre-pandemic inflation averaged closer to 3.5% globally.
"What we're seeing right now is relatively encouraging on inflation dynamics," said Gourinchas. "[In] 2023, growth could be bottoming out, inflation could be coming down. This could be a turning point."
But while Gourinchas said inflation may be on the right trajectory, he cautions rising input costs from energy prices or wage growth could again push up inflation. And with core inflation still higher than most central banks' target, the IMF doesn't think global central banks are done raising interest rates.
"We've had a few good [inflation] prints, but it's too early to really declare victory," Gourinchas said, noting the battle against inflation is "not yet won." Gourinchas also said the Fed's expectation to raise rates above 5% this year seems appropriate.
Optimism for the U.S. economy
The IMF is more optimistic about the outlook for the U.S. economy than the Fed in its latest forecast.
The IMF is forecasting GDP growth of 1.4% this year, while the Fed sees growth coming in at just 0.5%.
Gourinchas said despite starting to see layoffs outside of the technology sector, the U.S. job market is still tight right now. With the Fed raising rates to cool off the economy this year and into 2024, the IMF expects the unemployment rate to rise to slightly above 5% in 2024 from 3.5% as of December 2022.
Rising unemployment, however, won't necessarily coincide with a recession, in the IMF's view, and Gourinchas said a soft landing is possible for the U.S. economy this year.
"We still believe there is a narrow path to avoid a recession this year, but it is a narrow path and there could well be a recession if more tightening is needed or if there are some more adverse shocks," said Gorinchas.
Failure to raise the nation's borrowing limit could be one of those shocks.
The IMF's report notes liquidity in the U.S. Treasury market has deteriorated to levels not seen since March 2020, the lows of the pandemic.
With the Fed raising rates, albeit at a slower pace, and continuing to unwind its balance sheet, House Republicans using the debt ceiling as a negotiation tool for spending cuts could risk an adverse liquidity event in the US Treasury market.
"It would be it would be a huge blow, I think, to both the U.S. economy, the global economy and the U.S. Treasury market, which is one of the pillars of the international financial system," Gourinchas said.
"It's certainly something that would threaten stability. We strongly encourage all the parties to reach to reach an agreement on this and sort of avoid such a such a negative outcome."