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Recession watch: Why the IMF has begun to strike a more positive tone

IMF Deputy Managing Director Gita Gopinath has cautiously suggested that 2023 could herald a better-than-expected year for the global economy

The International Monetary Fund has suggested that 2023 could be a better-than-expected year for the global economy as positive data begins to dampen expectations of a global recession.

While Deputy Managing Director Gita Gopinath reaffirmed the IMF’s forecast of global growth of 2.7% in 2023, a deceleration from 3.2% in 2023, she told the World Economic Forum in Davos on Tuesday s expect an “improvement” in the second half of the year. and until 2024.

She said that while the war in Ukraine, the lingering impact of the pandemic and high inflation meant a “difficult year” ahead, “there are signs of resilience” in the global economy.

IMF Deputy Managing Director Gita Gopinath has cautiously suggested that 2023 could herald a better-than-expected year for the global economy

IMF Deputy Managing Director Gita Gopinath has cautiously suggested that 2023 could herald a better-than-expected year for the global economy

The latest IMF forecasts in November - new data will be released later this month

The latest IMF forecasts in November – new data will be released later this month

Specifically, Gopinath pointed to a strong labor market and consumption that is “holding up” in many markets.

She said: “We expect global growth to bottom out this year but improve towards the second half of this year and into 2024.”

The IMF’s updated forecasts for the global economy will be released on January 31.

While the final months of 2022 have been dominated by gloomy forecasts for the global economy, data out of the US and Europe in recent weeks has eased some concerns.

In the United States, inflation is falling faster than expected, while the Commerce Department said in December that GDP growth in the third quarter was stronger than expected at 3.2%. An update on the US economy’s fourth quarter results will arrive later this month.

A similar picture is seen in the Eurozone, where annual inflation rose from 10.1% to 9.2% in December 2022 and GDP grew by 0.2% in the third quarter.

German Chancellor Olaf Scholz added to the optimism on Tuesday when he told Bloomberg that Europe’s largest economy would avoid recession altogether.

The OECD has previously predicted that the UK economy will lag behind all G20 countries except Russia

The OECD has previously predicted that the UK economy will lag behind all G20 countries except Russia

ING analysts said on Wednesday: “Markets [are] no longer values ​​a disastrous recession for the euro zone.

“This is reflected in a better appetite for riskier investments and has accelerated the outperformance of riskier bonds relative to safer bonds. In a nutshell spreads tighter. However, the two developments could turn out to be contradictory, as better growth could slow the decline in inflation.

Witan Investment Trust CEO Andrew Bell added: “The decline in inflation in many economies has reduced the risk of overzealous monetary tightening and increased the possibility of a soft landing for the global economy. or a period of relatively mild recession.

Bell also highlighted “non-cyclical factors boosted by recent events” that could boost growth prospects, such as increased investment in supply chain resilience, increased global defense spending and “the ‘increase in infrastructure investment in sustainable energy sources’.

The global economy is also ready to receive a bullet in the arm from its second largest contributor, China, which is now lifting its extreme Covid-19 restrictions.

Ewan Thompson, fund manager of the Liontrust Emerging Markets fund, said: “Given recession fears looming over developed economies this year, the global economy will receive welcome support from China, where growth will accelerate rapidly at a moment of considerable uncertainty elsewhere.’

The Bank of England has continued to raise interest rates throughout 2022

The Bank of England has continued to raise interest rates throughout 2022

A tougher outlook for the UK economy

The outlook for the UK economy remains relatively weak, however, even as inflation starts to ease and after the ONS raised its growth measure for November.

Britain is expected to see the weakest growth of any G20 economy in 2023 except Russia.

Oliver Rust, product manager at independent inflation data aggregator Truflation, said: “There’s no sugar coating: it looks like it’s going to be another tough year for the UK economy. ” Inflation is expected to remain elevated and unlikely to return to the BoE’s 2% target any time soon.

“That, combined with high interest rates, wage cuts and rising unemployment, means the UK is likely to be heading into recession – if it isn’t already.

‘We are [also] not yet understood the full impact of Brexit on the UK economy, although we know it is already hurting small and medium-sized businesses who are struggling to export their goods to Europe. It is perhaps the biggest known unknown of 2023 that could play a significant role in the performance of the UK economy.

While UK inflation is falling, it remains stubbornly high and analysts expect the BoE to continue on its rate hike path – starting with a 50bp jump to 4% at the beginning of February.

The bullish cycle will weigh further on growth in a more conservative credit environment, even as the UK economy beats expectations in the year ahead.

Marcus Brookes, chief investment officer at Quilter Investors, said: “As a recession is forecast, the UK economy surprised with a positive GDP reading in November.”

“So it could be that things are not as bad on the economic front as previously feared and that the BoE is keeping its foot on the accelerator.

“If inflation doesn’t start to come down a bit faster than it is, then any chance of a reversal in monetary policy is getting more unlikely by the day.”

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