World—Economic and trade outlook deteriorates while risks increase

The IMF expects countries accounting for one-third of the global economy to contract this year or next. Overall, its global growth forecast was downgraded to 2.7% in 2023—the weakest since 2001 aside from the GFC and the acute phase of COVID-19. This reflects significant slowdowns in the world’s largest economies—the US, euro area and China (combined constituting 50% of Australian exports last year). In the US, the IMF says tighter monetary and financial conditions will slow growth to 1% next year. In the euro area, the energy crisis caused by Russia’s invasion of Ukraine will reduce growth to 0.5%. In China, the IMF expects the weakening property sector and strict COVID-19 containment policies will see growth of 4.4% (well below Beijing’s 5.5% target). Given the importance of China in supply chains, this will weigh heavily on global trade. The downgrades to growth will result in permanent output losses; scarring from the pandemic and the war are forecast to leave the global economy 4.6% smaller in 2024 than had been expected in January 2020.

Moreover, downside risks remain unusually large. The risk of a policy miscalibration has risen sharply amid growing uncertainty. Despite the economic slowdown, inflation is proving broader and more persistent than expected (Chart). Monetary under-tightening would further entrench inflation, erode the credibility of central banks, and de-anchor inflation expectations. Over-tightening risks are pushing the global economy into an unnecessarily deep recession and stoking financial market turmoil. Other risks include a worsening of the impact of Russia’s war in Ukraine; a resurgence in COVID-19 or another pandemic; a Chinese property crash; emerging market debt distress; and fragmentation of the world economy. But despite ‘stormy waters’ ahead, large export markets like Saudi Arabia, India and the ASEAN-5 (expected to outperform China for the first time since 1990), are among the few countries expected to see relatively strong growth and moderate inflation.

Despite the economic slowdown, inflation is proving broader and more persistent than expected.

Source: IMF World Economic Outlook, October 2022.