But why does the IMF say "it's too early to celebrate now"?, Depth | Raising World Economic Growth Expectations for This Year | World Economy | IMF World Economic Outlook Report

On July 25th, the International Monetary Fund released an update to the World Economic Outlook report.

This updated report titled "Short term Resilience, Continuous Challenges" places the world economy in a shadow of light and shadow.

On the one hand, the IMF is certain of the signs of progress showing in the short term and has raised its global economic growth forecast for 2023 by 0.2 percentage points to 3% compared to April.

On the other hand, the IMF warns that although the world economy is on track, it is still struggling, with weak growth and facing multiple downward risks.

As 2023 enters the second half of the year, with a series of economic data released from various countries, what key clues does the IMF's updated report provide for people to see the global economic outlook clearly?

Seeing signs of progress

Compared to the April report, the biggest highlight of the latest report is the adjustment of the world economic growth rate from 2.8% to 3% this year.

Don't underestimate the 0.2 percentage point fine-tuning. Behind it comes the IMF's praise: "The global economy continues to recover gradually from the impact of the epidemic and the Russia-Ukraine conflict. In the short term, there is no denying the signs of progress."

In the IMF's view, these "signs of progress" can be seen from time to time: the COVID-19 epidemic no longer constitutes a "public health emergency of international concern"; Smooth supply chain flow; Global economic activity showed resilience in the first quarter of this year; The labor market is strong

Xu Mingqi, a special researcher at the Shanghai Institute of International Finance and Economics and Vice Chairman of the Shanghai International Economic Exchange Center, believes that the tone of the IMF's latest report is relatively optimistic compared to April. This is mainly because the situation has changed over the past three months.

The downward adjustment of expectations in April was due to encountering headwinds. This includes difficulties in reducing inflation in Europe and America, sustained interest rate hikes, geopolitical tensions, and so on.

In particular, the turbulence in the banking industry of the United States and Switzerland may trigger the global financial crisis, as well as the risk of US debt default, all of which cast a shadow on the global economic prospects.

Nowadays, these "headwinds" have either weakened - inflation has cooled down, or the situation has calmed down - the financial turmoil in the United States has come to an end, and debt defaults have also turned the tide, resulting in an overall improvement in the economic situation.

Xu Mingqi said that although the data for the second quarter has not been fully released, there has been an overall improvement.

The resilience of the US economy is evident, with inflation rate rapidly falling to 3% in June. The expectation of interest rate hikes will come to a halt. The possibility of falling into recession is decreasing.

The Chinese economy achieved a growth rate of 5.5% in the first half of the year and is expected to further recover in the second half.

Despite low growth rates, Europe still has resilience.

Xu Mingqi pointed out that although the IMF expects the German economy to shrink by 0.3% this year, this is mainly related to Germany's significant adjustment of its energy structure, which has affected the manufacturing industry. Other European countries with a high proportion of service industries and low energy dependence, such as Italy and France, are accelerating their economic growth.

Chen Fengying, a researcher at the China Institute of Modern International Relations, pointed out that the IMF's upward adjustment of this year's growth forecast is based on positive signs in both economic and political aspects.

One is that the macro environment has improved. Developed countries have better than expected economies, especially the largest economy, the United States, and the risk of recession is decreasing; The Federal Reserve's tightening policy may come to an end; Maintaining vitality through technological innovation, such as focusing on the field of artificial intelligence; The overall employment level is good. The economic risks in Europe are also relatively controllable and have not been crushed by energy crises and geopolitical conflicts; In the Asian direction, the economy has also remained generally stable. In addition, inflation is gradually decreasing.

The latest IMF report predicts that global inflation will drop from 8.7% in 2022 to 6.8% this year and further to 5.2% next year.

Secondly, international relations are trending towards a benign adjustment. The most obvious sign is the improvement in Sino US relations. In terms of geopolitics, Europe, which is under the shadow of the Ukraine crisis, may still have variables, but with the easing of tensions between China and the United States, the relative certainty in Asia is increasing.

The recovery is still weak

However, do not overestimate the 0.2 percentage point reward. While the IMF is sending out candy, it is also preparing a glass of bitter wine: although the global economy is moving in the right direction, it is still not out of trouble.

If measured by historical standards, 3% of global growth remains weak, lower than the average annual growth rate of 3.8% between 2000 and 2019.

At the same time, the IMF has cautiously outlined the post pandemic global economic recovery picture: the pace is slowing down, and the gaps between various economic sectors and regions are constantly widening.

Among them, the growth of developed economies has significantly slowed down, and it is expected that the growth rate will decrease from 2.7% in 2022 to 1.5% in 2023.

In contrast, growth in emerging markets and developing economies will continue to rebound, with a growth rate of 4.0% in 2023, up 0.1 percentage points from the April forecast.

Xu Mingqi pointed out that the reason why the post epidemic recovery momentum is weak is that the main factors that have restrained the recovery since the epidemic are still at work.

Firstly, the interest rate level remains high. It is widely expected that the Federal Reserve and the European Central Bank will raise interest rates again this week. High interest rates are not conducive to economic recovery.

Secondly, with a high debt ratio, many countries have unsustainable finances, let alone stimulating the economy.

Thirdly, there has been a significant adjustment in the structure of the labor market.

Fourthly, geopolitical factors combined with economic insecurity have a negative impact on global trade, investment, and supply chains.

"The above factors have constrained the world economy to recover to pre pandemic levels in the short term."

Analysts also say that as the gap between various economic sectors and regions widens, the pace of economic recovery is also being dragged down.

Chen Fengying commented that the widening gap highlights the issue of development crisis. In the past, during the vigorous development of globalization, the gap between developed and underdeveloped countries was narrowing; However, after the COVID-19 epidemic and the Ukrainian crisis, the gap has gradually widened, leading to asynchronous recovery. In some underdeveloped countries, due to the lack of substantial structural issues addressed in previous years of development, the foundation for recovery is not solid. The crisis in Ukraine has caused a food and energy crisis, which has further exacerbated the original economic problems.

Does China lose its momentum?

In recent years, the "China data" in each IMF report has been particularly eye-catching, and this year is no exception.

As in April, the IMF still maintains a growth expectation of 5.2% for China's economy this year.

But unlike before, the IMF has issued a reminder that China's recovery may slow down, partly due to unresolved real estate issues and negative cross-border spillover effects.

How to interpret the IMF's stable expectations and goodwill reminders towards China?

Analysts believe that the IMF's maintenance of expectations for the Chinese economy is based on both the second quarter GDP data and overall growth in the first half of the year, as well as the current economic situation. "For example, the real estate industry is sluggish, industrial investment growth is slow, and private enterprise investment has not been boosted," said Xu Mingqi.

In fact, the just held Central Political Bureau meeting, while setting the tone for "sustained recovery of the national economy and overall improvement," also did not hesitate to mention "new difficulties and challenges": insufficient domestic demand, operational difficulties for some enterprises, multiple risks and hidden dangers in key areas, and a complex and severe external environment.

Meanwhile, both scholars do not agree with the foreign media's claim that China's economic recovery has lost momentum.

Xu Mingqi believes that Western public opinion's understanding of the Chinese economy is still limited to GDP growth data and intends to criticize the Chinese economy. In fact, with significant changes in economic structure, growth drivers, and external environment, China has already made a new positioning, which is not to pursue high-speed growth, but to pursue high-quality and sustainable economic development.

The latest report from the IMF also accurately points out that the composition of the Chinese economy has changed, despite poor investment performance, consumer growth is basically in line with expectations.

"In the second half of this year, it is expected that China's economic growth will be slightly higher than the first half. This is because with structural improvement, innovation driven, and the continuous implementation of relevant policies, such as the '31 Measures for Private Economy', the vitality of the domestic market may be released, and confidence will be further restored." Xu Mingqi said.

Chen Fengying stated that as stated at the Politburo meeting, China's economic recovery will be a "wave like development and tortuous progress", which may require a longer period of adjustment. However, even if climbing over a hill, there is still no loss of power. The meeting pointed out the direction and also faced the problem itself, which is a manifestation of vitality and vigor.

When will we get out of the predicament?

Looking ahead to the world economic outlook, "many challenges still hang over the horizon, and it's too early to celebrate now," said Pierre Olivier Gulansha, Chief Economist of the IMF.

The IMF warns that there are still multiple downward risks to global economic growth. The primary task for most economies remains to curb inflation while ensuring financial stability.

"If further shocks occur, such as the escalation of the Ukrainian crisis, extreme weather events, etc., inflation may further rise, triggering more restrictive monetary policies, and the financial sector may experience a resurgence of turbulence," the report wrote.

Two scholars pointed out that due to the Ukraine crisis not ending in the short term, energy and food prices remain high, coupled with other uncertain factors such as supply chains. From a global perspective, although inflation has cooled down, pressure is still present. Therefore, inflation is still regarded by the IMF as the top risk to world economic growth.

In addition to inflation, the IMF also lists other sources of risk, such as increased debt pressure on emerging markets and developing economies, and deepening geopolitical divisions.

"High interest rates have exacerbated the debt difficulties of some developing countries. Although the IMF has done a lot of work, it is difficult to solve in the short term, and the risks always exist," said Xu Mingqi.

Given the Ukrainian crisis and other geopolitical tensions, CNN pointed out that deepening geopolitical fragmentation is another major risk, which could shift globalization towards more nationalistic and divisive ways, disrupting cross-border trade, capital and personnel flows, and commodity prices.

So, when can the world economy get rid of risks and overcome difficulties?

Xu Mingqi predicts that the current weak situation may continue until the second half of next year and is expected to ease. In addition to factors such as economic cycles and policy implementation, some hopes that can be placed on include: inflation "cooling off" and countries relaxing their tightening policies; Confidence continues to accumulate and rise; Breakthroughs in AI and technology have turned them into products, increasing people's demand for new consumption and investment, and so on.

But Chen Fengying felt that she still couldn't see the way ahead clearly. "From the COVID-19 to the Ukrainian crisis to Sino US relations, the world is no longer facing a normal crisis, and the world's economic sector and structure are changing. Normal crises can be predicted normally, but it is difficult to use the cycle theory to judge abnormal crises, so it is hard to say what the future will be like."