24 November 2023

Global growth is slowing with increasingly uncertain economic conditions on the horizon. In its latest forecasts published on April 11, the International Monetary Fund (IMF) estimates that it should not exceed 2.8% in 2023, against 3.4% in 2022, i.e. 0.1 percentage point less compared to to what had been anticipated in January 2023. The slowdown is more pronounced in the advanced economies, particularly in the euro zone where growth is dropping, falling from 3.5% in 2022 to 0.8% in 2023.

The United Kingdom and Germany are expected to be among the only countries in the world to record a contraction in their GDP (respectively –0.3% and –0.1%) in 2023. Even the economy of Russia, although under sanctions, should do better with an increase in its GDP of 0.7% in 2023. On April 6, the boss of the IMF, Kristalina Georgieva, declared that growth over the next five years would be around 3%, “our weakest medium-term outlook since 1990”.

But it is inflation that particularly holds the attention of the IMF. And for good reason: it is slowing more slowly than expected, despite a sharp rise in interest rates around the world. It should remain at 7% in 2023, compared to 8.4% in 2022. This is twice as high as before 2021, and well beyond the objectives that all the affected countries had set themselves.

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This inflation is not only the consequence of the rise in agricultural and energy prices, which after having peaked at the time of the Russian invasion of Ukraine in mid-2022, has slowed down, nor to an increase wages which, despite major tensions on the labor market, “remains contained” according to the IMF. The institution notes that demand, i.e. consumption or investment, remains “stronger than expected”what “may require further monetary policy tightening or a longer-than-expected tightening.”

Concerns for the financial sector

But the task of central banks has become even more complicated, with the recent bank failures in the United States which were caused by a rise in interest rates. The US Federal Reserve’s rate hike of between 4.75% and 5% led to the bankruptcy of several US regional banks in March, in the wake of Silicon Valley Bank (SVB) in early March, and the hasty takeover of Credit Suisse by UBS.

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Not only do financial institutions have to slow the rise in prices without sacrificing growth, a point of equilibrium that is difficult to find, but they must also take care not to fuel financial instability. “What is more worrying is that the sharp tightening of monetary policy over the past twelve months is starting to have significant collateral effects on the financial sector,” notes Pierre-Olivier Gourinchas, the chief economist of the IMF, who does not exclude that “the financial system is put to the test again”.

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