In its latest World Economic Outlook, the International Monetary Fund (IMF) said it expected growth in the global economy to slow from 3.5% last year to 3% this year amid high inflation, a slowing China, and the war in Ukraine.
- The global economy will ease from 3.5% last year to 3% this year amid sticky inflation, the war in Ukraine, and a slowing China.
- The IMF has warned central banks there is a long road ahead in terms of lowering inflation, and not to prematurely stop rising rates.
This is however, a slight uptick, considering the IMF initially forecast the global economy to grow by 2.8% just three months earlier.
And while the signs of progress are undeniable, IMF Chief Economist Pierre-Olivier Gourinchas remains cautious.
“Yet many challenges still cloud the horizon, and it is too early to celebrate,” Dr Gourinchas said.
The IMF said it expected growth in advanced economies to slow sharply this year, and for inflation to remain well above central bank targets.
The culprit? There is the risk that if inflation stays elevated, this would prompt higher interest rates and therefore lead to a loss of momentum in global activity.
The IMF expects global inflation to fall from 8.7% last year to 6.8% this year, a 0.2% downward revision from the April outlook report, and 5.2% in 2024.
A 6.8% global inflation rate matched with a 3% growth rate implies a real slump of 3.8%.
But while inflation appears to be heading in the right direction, Dr Gourinchas said central banks should avoid easing interest rates prematurely as the battle against inflation is not yet won.
“That is, until underlying inflation shows clear and sustained signs of cooling,” he said.
“More worrisome, core inflation in advanced economies is expected to remain unchanged at 5.1% annual average rate this year, before declining to 3.1% in 2024.
“We are not there yet.”
The updated IMF forecasts come shortly before the release of Australia’s June quarter consumer price index results, which revealed headline inflation fell to 6% from 7% in March.
Major bank economists forecast headline inflation to clock in between 6-6.3%.
And while this decrease may be welcome news, the RBA doesn't expect underlying inflation to reach its target band of 2-3% until 2025.
As of COB 25 July, markets ascribed a 59% chance of a hold at next week’s monetary policy meeting. This may rise by the end of today considering the inflation rate was below expectations.
Power bill subsidies no more
Dr Gourinchas said now is the time for governments to restore their budgetary positions, specifically pointing the finger towards household energy bill relief.
“This is not a call for generalised austerity: the pace and composition of this fiscal consolidation should be mindful of the strength of private demand, while protecting the most vulnerable,” he said.
“Yet, some consolidation measures seem entirely appropriate.
“For instance, with energy prices back to their pre-pandemic levels, many fiscal measures, such as energy subsidies, should be phased out.”
The May 2023 Federal Budget seems to have done the opposite, with a $3 billion package included to lower energy bills, split between the state and federal governments.
In Queensland alone, all households will receive a $550 rebate on their electricity bill in 2023-24.
However, in response to the IMF’s report, Treasurer Jim Chalmers said the Labor government has found a balance between supporting households and building a secure economy.
“In the face of ongoing global challenges, the Albanese government’s economic plan is all about making the budget more responsible, our economy more resilient, and providing responsible cost-of-living relief that doesn’t add to inflationary pressures,” Mr Chalmers said.
"IMF sends warning to central banks: avoid easing rates prematurely" was originally published on Savings.com.au and was republished with permission.