War against inflation may be turning: IMF

The world’s central banks may be winning the battle against inflation, the International Monetary Fund has suggested as it modestly upgraded its outlook for the global economy thanks in part to a sharp fall in global oil prices

In its world economic outlook update released today, the fund upwardly revised its forecasts for 2023. It expects the global economy to expand by 2.9 per cent this year, a 0.2 percentage point improvement from what it had tipped in October.

The IMF modestly upgraded its outlook for the global economy thanks in part to a sharp fall in global oil prices.Credit:Peter Rae

The upgrade is largely due to stronger-than-expected growth in the United States and the eurozone. Britain’s economy, however, is forecast to contract by 0.6 per cent, a 0.9 percentage point deterioration from October. There is no separate forecast for Australia.

Despite the lift, global growth at 2.9 per cent would be down on the 3.1 per cent recorded in 2022 and less than half the 6.2 per cent of 2021.

The fund’s director of research, Pierre-Olivier Gourinchas, said there were still ongoing risks to the economy, led by efforts to quell inflation, the war in Ukraine and how China emerged from its COVID lockdowns.

“Despite these headwinds, the outlook is less gloomy than in our October forecast, and could represent a turning point, with growth bottoming out and inflation declining,” he said.

“Economic growth proved surprisingly resilient in the third quarter of last year, with strong labour markets, robust household consumption and business investment, and better-than-expected adaptation to the energy crisis in Europe.

“Inflation, too, showed improvement, with overall measures now decreasing in most countries—even if core inflation, which excludes more volatile energy and food prices, has yet to peak in many countries.”

Central banks, including the Reserve Bank, have aggressively increased interest rates over the past 12 months to bring inflation under control.

The RBA is expected to use its first meeting of the year on February 7 to take Australia’s cash rate to a 10-year high of 3.35 per cent. The cash rate was at 0.1 per cent in April last year.

The IMF said it is expecting oil prices to fall by about 16 per cent this year. Non-fuel commodity prices are also tipped to drop by 6.3 per cent on average.

The fund is forecasting inflation for the world’s largest economies to slow from 8.8 per cent last year to 6.6 per cent in 2023 and then 4.3 per cent in 2024.

It believes there is a chance inflation pressures could ease even faster, depending on how quickly job markets react to higher interest rates. A lift in unemployment could bring down wage pressures and general inflation.

But the IMF also said there are downside risks to the economic outlook. They include China’s economy stalling as it comes out of its lockdown, an escalation of war in Ukraine, a persistence of inflation or pressure on governments struggling with the level of debt they have taken on over recent years.

Treasurer Jim Chalmers says the global economy still faces a tough period ahead.Credit:Alex Ellinghausen

Treasurer Jim Chalmers said the IMF report showed the world economy still faced a “dark and difficult path”.

“While the slight upgrades to global growth are welcome, the IMF is still predicting the weakest two-year period for the global economy – aside from the downturns caused by the GFC and pandemic – in a generation,” he said.

“Our prospects continue to be shaped by the energy havoc caused by the war in Ukraine, the impact of interest rate rises around the world, the fate of major economies in the northern hemisphere, and China’s management of COVID-19.

“And here in Australia, this summer has shown once again natural disasters are an ever-present danger to our communities and our economy.”

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