MARRAKECH, Morocco, CMC – The International Monetary Fund (IMF) Tuesday released its World Economic Outlook amidst fresh fighting between Israel and Gaza that could result in higher food and fuel prices for struggling regions like the Caribbean even as the global economy is still “limping along.”
The outlook, dubbed “Navigating Global Divergences,” was released as part of the IMF’s annual meetings under the theme “Reinvigorating Global Cooperation.”
“Medium-term growth prospects have weakened since the global financial crisis, especially for emerging markets and developing economies,” Pierre-Olivier Gourinchas, chief economist and director of the Research Department of the IMF, said at a press conference to launch the report.
“The implications for these countries are profound,” he told the meeting, which is being held through October 15, representing the first time in 50 years that the IMF’s annual meetings are being held in Africa.
Gourinchas said lower economic growth in developing countries also means a much slower divergence towards the living standards of advanced economies.
It also reduces fiscal space, increases debt vulnerabilities and exposure to shocks, and diminishes opportunities to overcome the scarring from the pandemic and the war in Ukraine.
“With lower growth, higher interest rates, and reduced fiscal space, structural reforms of the right time and time become key. Higher long-term growth can be achieved through a careful sequence of reforms, especially those focused on governance, business regulations, and the external sector.”
He said that these first-generation reforms help unlock growth and make subsequent reforms much more effective, whether to credit markets or labor markets or for the green transition.
“The weaker growth prospects also reflect the rising incidence of climate risk with increased frequency of large natural disasters, and rising geo-economic fragmentation such as the trade tensions leading to US-China decoupling,” the IMF official said.
He said that the IMF is saddened by the loss of lives in the Israel-Gaza conflict and is monitoring the situation very carefully regarding the economic impact it could have on the region and beyond.
“I think we have to be cautious. I think it too early to assess the impact,” he said, noting that the conflict erupted after the current projections were closed.
“But we would have to wait a little bit before seeing what the impact might be. Of course, we all hope for a rapid de-escalation of the conflict and the violence,” Gourinchas said.
Asked to comment on the impact of the conflict and oil prices and the disinflation process, Gourinchas said the IMF has observed that oil prices had increased by four percent over the last few days.
“And, of course, this is something that we see often in situations where there is geopolitical instability in the region. We see spikes in energy prices and oil prices. We’ve seen that in previous crises and previous conflicts,” he said.
“And of course, this reflects the potential risk that there could be disruptions either in production or transport of oil in the region,” he further stated, even as he emphasized that it is a bit too early to assess how much of those movements in oil prices are going to be sustained.
“The work we’ve done in the research department at the fund suggests that if there is something like a 10 percent increase in oil prices, this would weigh down on global output by about 0.15 percent in the following year and increase global inflation by about 0.4 percentage points.
“So that gives you a rough idea of the magnitude. But again, I emphasize that it’s too early to jump to any conclusion here,” Gourinchas said.
On Sunday, St. Vincent and the Grenadines Prime Minister, Dr. Ralph Gonsalves, noted the emerging Israel-Gaza conflict, the first between the two states in over a decade.
“Oh, there is so much. There are so many challenges in the world. There’s so much drift, so much war, so much confusion. We see what is happening now between Israel and the Palestinians, Hamas in Gaza,” said Gonsalves, the longest-serving head of state in the Caribbean Community (CARICOM), a 15-member political union.
“Of course, it connects with all the Palestinians everywhere in the Arab world. Ukraine is still there, continuing like a war without end. We see the terrible deterioration of relations between two Commonwealth countries, two of our close friends, India and Canada. We see the issue between Venezuela and Guyana, two of our friends, and that has potential for a real disturbance because it may involve external partners too of one kind or another,” Gonsalves said.
Meanwhile, in presenting the Global Economic Outlook, Gourinchas said the global economy continues to recover from the pandemic and Russia’s invasion of Ukraine, showing remarkable resilience.
“Yet growth remains slow and uneven. The global economy is limping along, not sprinting. Under our baseline forecast, growth will slow from 3.5 percent last year to three percent this year and 2.9 percent next year — a 0.1 percentage point downgrade for 2024,” he said.
He said the growth rate remains well below historical averages.
“Important divergences are appearing. The slow down is more pronounced in advanced economies and in emerging markets in developing economies.”
He said that among advanced economies, the United States has been revised up with resilient consumption and investment while the euro area has been revised down as tighter monetary policy and the energy crisis took a toll.
“There is divergence also among emerging markets in developing economies,” Gourinchas said, adding that China faces growing headwinds while India and Russia are revised up.
“The inflation news is encouraging, but we’re not quite there yet. Headline inflation continues to decelerate, and core inflation, excluding food and energy prices, is also projected to decline gradually. However, all in all, most countries are not expected to return inflation targets until 2025.”
He said commodity prices could become more volatile with increasing climate and geopolitical shock.
“This will represent a serious risk to the disinflation strategy,” he said, noting that between June and September, oil prices increased by about 27 percent on the back of extended supply cuts from OPEC countries before going back more recently by about eight percent.
Gourinchas pointed out that food prices remain elevated and could be disrupted further by an escalation of the war in Ukraine, and inflation remains uncomfortably high.
“Near-term inflation expectations have risen markedly above target. Bringing these expectations back down is critical to winning the battle against inflation.”
He said fiscal buffers have eroded in many countries with elevated debt levels, rising funding costs, slowing growth, and an increasing mismatch between the growing demands on the state and available fiscal resources,” adding “this leaves many countries more vulnerable to crises.”
He told the media that despite tightening monetary policy, financial conditions have eased in many countries.
On the fiscal front, the IMF said the global economy must renew its focus on managing budgetary risks and adding buffers.
“… buffers need to be rebuilt, including by phasing out energy subsidies while still protecting the vulnerable.”
The IMF official said fiscal and monetary policies pulled in the same direction last year, which helped the disinflation process, but this alignment has weakened.
Responding to a question about the IMF’s position on monetary policy, Gourinchas acknowledged that several regions worldwide have seen a considerable increase, particularly in the price index coming from the energy index for some countries’ food prices.
“Now, does that mean that monetary policy has no role? The answer is no. Why? Because these shocks to headline inflation tend to feed into broader measures of inflation.”
He said the shocks first hit the energy bill.
“But then, the energy bill is part of the production costs for businesses. It’s part of the living expenses for workers. So then it leads to higher demand for wages. It leads to higher prices for businesses, then it gets into underlying measures of inflation,” Gourinchas explained.
“And what is important for monetary policy is to make sure that the underlying measurement of inflation is going to be coming down, and if this is not contained, then it gets into measures of expectations of inflation, you see inflation high for a while you come to expect inflation to be high for a while and then it becomes almost self-sustaining.”
He said monetary policy has a role in ensuring that those inflation expectations and underlying measures of inflation are contained, even if the source of the shock could be on the energy side.
“And this is why our recommendation for central banks around the world, in the face of a fairly persistent energy price shock, is that they need to tighten monetary policy, which is showing its effect already in the world economy. It’s been cooling off global output for sure, but it’s also showing signs it’s bringing down inflation and back down to central banks targets,” Gourinchas told reporters.
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