The International Monetary Fund (IMF) has said that inflation is set to remain high despite expectations of weaker global growth of 2.9% next year, down from 3.5% in 2022 and 3% this year.
According to a Financial Times report, while a spate of rate rises by multiple central banks is taming price pressures and weighing on global growth inflation is still expected to hang above target in 93% of economies with an inflation goal, including the US, the IMF said in its latest World Economic Outlook, released today.
Central Banks
Most central banks, including the Fed, the European Central Bank, and the Bank of England, target inflation of 2%, PCE inflation in the US is now 3.5%, against CPI inflation of 4.3% in the euro area and 6.7% in the UK.
“Returning inflation to target is expected to take until 2025 in most cases,” the IMF warned.
Inflation is set to remain high despite expectations of weaker global growth of 2.9% next year, down from 3.5% in 2022 and 3% this year”, according to the IMF’s latest forecasts.
The legacy of central bank tightening is playing out in credit markets, the IMF found, with “clear signs that tighter credit conditions are increasingly affecting real activity”.
Credit and investment
The report noted that in advanced economies, credit and investment demand shrank in the first half of the year. House prices have been growing more slowly or going into reverse, while bankruptcy rates have been up 20% in the US over the past year.
But tougher conditions do not amount to a “credit crunch”, the IMF added.
Surprisingly robust hiring data in the US helped renew a global sell-off on bond markets on Friday, as investors bet official interest rates would stay higher for longer than originally anticipated.
According to the report, the Ice Bank of America index of US 30-year Treasuries has fallen by 13.5% since the start of the year.
Yields on 30-year US debt reached a 16-year high of more than 5% last week, before settling to 4.95% when markets closed.
GDP forecasts
The fund lifted its GDP forecasts for the US this year and next, from an earlier round of projections in July. It now predicts an expansion of 2.1% in 2023 and 1.5% in 2024.
The upgrade of 0.3 percentage points in 2023 and 0.5 percentage points for 2024 reflects stronger business investment and resilient consumption, as well as “expansionary” fiscal policy this year, the IMF said, predicting the US was set to rack up net borrowing of 8.2% of the country’s GDP.
The forecast for the euro area was cut, however, to growth of 0.7% this year and 1.2% in 2024. Germany is predicted to be particularly weak, with output falling 0.5% this year before rising by just 0.9% in 2024.
Among G7 economies, Japan is set for the firmest growth after the US this year, at 2%, before momentum fades next year with growth tipped to be 1%.
The UK economy will barely expand, with GDP seen rising by just 0.5% in 2023 and 0.6% in 2024, the latter figure some 0.4 percentage points below prior forecasts.
The IMF trimmed its predictions for Chinese growth both this year and next, forecasting growth of 5% in 2023 and 4.2% in 2024.
