The world economy is again at a particularly uncertain time, according to the latest assessment by the International Monetary Fund (IMF), due to the cumulative effect of adverse shocks in the last three years, which include the COVID-19 pandemic, the war in Ukraine, as well as extreme weather events. 

Inflation has hit record highs in decades and, to bring it back to its respective targets, advanced economies’ (AEs) central banks have aggressively tightened their monetary policies since late 2021, slowing global economic growth. 

Higher interest rates, loopholes in financial regulation and specific risks in some financial institutions also had negative impacts on financial stability. In Mar'23, the unexpected bankruptcy of two regional banks in the United States (Silicon Valley and Signature Bank) spread to Europe, leading to the collapse of confidence in a “too big to fail” global bank, Credit Suisse. 

The swift and bold action of the American and Swiss governments prevented, in the IMF's view, the outbreak of a global financial crisis, such as that of 2008. But, despite this, global financial conditions have since become even more adverse and risks of financial instability remain present. 

However, the IMF's basic scenario for the global economy, released in Apr'23, practically did not change compared to the previous edition. The projection for world GDP is for growth of +2.8% in 2023, that is, a deceleration compared to the +3.4% estimate for 2022. For 2024, a 3% expansion is expected. 

This means a reduction of 0.1 percentage point compared to Jan'23 projections for this year and the next. The framework designed by the Fund assumes that the turbulences in the financial sector have been contained and, with this, there will be no significant impact on economic activity neither in 2023 nor in 2024. 

Taking the most recent projections, that is, those released from Mar'23 onward, a comparison with other prominent multilateral bodies is appropriate. For both the OECD and UNCTAD, global GDP is expected to grow less than the IMF estimates. For 2023, the OECD projects expansion of 2.6% and UNCTAD of 2.1%. For 2024, the divergence seems smaller, given that the OECD expects an increase of 2.9%. The World Bank's latest assessment is from Jan'23, not yet incorporating some relevant information, and UNCTAD has not released a projection for 2024.

Returning to the IMF outlook, advanced economies' GDP growth is expected to fall from +2.7% in 2022 to +1.3% in 2023. By 2024, almost none of this slowdown will be reversed, registering +1.4%. 

For Emerging Market and Developing Economies (EMDEs), the outlook is more favorable. The IMF forecasts a gentle slowdown from +4% in 2022 to +3.9% in 2023, and an acceleration to +4.2% in 2024. But this will not be verified at the same intensity throughout the region and Latin America should show greater volatility and much more modest results. 

For the IMF, the pace of Latin American GDP expansion will slow from +4% in 2022 to only +1.6% in 2023, the lowest performance among emerging regions. At the origin of this is the evolution of the two main economies: Brazil's GDP should vary only +0.9% in 2023 versus +2.9% in 2022, and Mexico's +1.8% compared to +3.1% in 2022. 

In 2024, Latin America and the Caribbean (+2.2%) should not fully recover the pace of growth of 2022, according to the IMF. Much of this is due to Brazil (+1.5%), which despite the greater dynamism should not return to the level seen 2022. In the case of Mexico (+1.6%), the trend is of lower growth, converging to the pace of the Brazilian economy. 

As for commodities, the IMF expects prices to decline as a result of demand deceleration, following the strong rise in 2021 and 2022. It is projected that the crude oil price will record declines of 24.1% in 2022 and of 5.8% in 2023. Non-energy commodity prices will remain virtually stable. 

With lower global GDP dynamism, the Fund expects that the volume of world trade will also grow less, decelerating from +5.1% in 2022 to +2.4% in 2023, after two years of recovery. 

In this context, consumer inflation is projected to fall from 8.7% in 2022 to 7% in 2023, that is, it should remain at a still high level. Around 76% of economies are expected to experience disinflation in 2023, according to the Fund, although inflation rates are expected to exceed their central bank's targets in 93% of economies. In several cases, the IMF points out, the return of inflation to the targets should occur only in 2025.

If the Fund's base scenario is confirmed, the global economy will grow below the average of the two decades prior to the pandemic: +3.9% between 2000–2009 and +3.7% between 2010–2019. In addition, the growth rates prevailing prior to the pandemic should not be resumed in the medium term. Growth forecast for 2028 is +3%, the lowest medium-term projection since 1990.

It is worth noting that the downward-tilted balance of risks of the base scenario has become more severe. The estimated probability of global growth falling below +2% in 2023—a performance observed only five times since 1970—is 25%, more than double the normal probability. The estimated probability of a recession is 15%. 

The IMF points out seven risk factors that, if materialized, can result in these two adverse scenarios: greater tightening of global financial conditions; more adverse impacts of restrictive monetary policy on economic activity in a context of high public and private debts; greater rigidity of inflation; systemic external debt crisis in EMDEs; weak growth in China; escalation of the war in Ukraine; and geopolitical tensions further hindering multilateral cooperation.

In the current context of especially high uncertainty, governments face the challenge of restoring price stability while avoiding recession and maintaining financial stability. The IMF recommends a set of policy initiatives—summarized at the end of this Letter IEDI (see publication in Portuguese)—with immediate, medium and long term impacts, to ensure sustainable and inclusive growth.

The full text is available in Portuguese.