IMF Global economic update – Still too optimistic 

Global Perspective

October 11, 2022

Executive summary

The International Monetary Fund (IMF) revised its 2023 global economic growth outlook downward to 2.7% from 2.9% and surprisingly kept the 2022 growth figure at 3.2%. These revised estimates are still above consensus estimates, including ours. We expect further downgrades to the IMF outlook during the rest of the year, including a half percentage point decrease for 2022. Furthermore, the 2023 outlook could fall below 2% if the European energy crisis leads to bottlenecks in supply chains, or if over-tightening in financial conditions leads to a liquidity crisis in the vulnerable parts of the global financial system.

What happened

The IMF maintained the 2022 estimates and downgraded the 2023 outlook

The IMF reiterated the 2022 global growth estimate of 3.2%, which is surprisingly optimistic to many observers as the global economic backdrop has deteriorated rather quickly since the last update in July. The IMF downgraded the U.S. economy's 2022 outlook significantly by 0.7%. In contrast, Europe saw some upgrades as the Mediterranean economies' outlooks improved due to tourism-related sectors recovering post-pandemic.

Chart 1 for outlook revisions for 2022   Two charts. One noting the select outlook revisions for 2022 vs. the previous IMF estimate from July 2022 and the second noting outlook revisions for 2023 vs. previous IMF estimate from July 2022.
Chart 2 for outlook revisions for 2023   Two charts. One noting the select outlook revisions for 2022 vs. the previous IMF estimate from July 2022 and the second noting outlook revisions for 2023 vs. previous IMF estimate from July 2022.

After these downward revisions, the global economy is now expected to grow by 2.7% in 2023. The IMF sees a 25% chance that the world economy's growth rates will falter below 2% next year, and many people will start feeling the effects of recessionary forces. Europe's 2023 economic outlook changed the most with energy shortages affecting manufacturing lines. China's economic outlook was downgraded to 4.4% for 2023. On the other hand, Russia is expected to contract 2.3% next year, which was revised upward by 1.2%. 

Our take

The IMF is still too optimistic

The IMF is too optimistic in maintaining the 2022 global economic growth assumption of 3.2%. We expect all three crucial economic regions – the U.S., Europe, and China – will grow below 3% this year. The last two quarters in the U.S. saw back-to-back negative economic growth. Therefore, achieving a 1% growth rate this year would be significant. Additionally, China's insistence on a zero-COVID policy has been taking a toll on economic activity. The current sluggish economic momentum could lead to a sub-3% growth rate in China. Finally, Europe, the epicenter of Russian aggression, can grow around 2.4% at best if the Mediterranean economies can keep the momentum they gained over the busy summer months. Consequently, we expect the 2022 estimates will be downgraded during the winter months. 

Since the start of the year, the global economy has lost 2% of real economic growth from earlier estimates. Since the world economy is around $100 trillion, each percentage point of lost growth equates to a $1 trillion loss in economic output.

Global inflation pressures are continuing to hamper economic activity. The most visible price increases happened in the European gas markets, where prices have increased more than four-fold since 2021. On a positive note, the Black Sea grain deal helped to ease food prices, resulting in the United Nations Food Price index declining six months in a row. Higher inflation has led to financial conditions being much tighter than expected. While we expect a slower pace in global inflation rates, the impending energy crisis in Europe could change the outlook quickly. Even if inflation fears subside from current levels, we expect even tighter monetary conditions, with major central banks aiming to regain credibility in their fight against inflation.  

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