The United States and emerging economies have become the engines of global growth

Global economic growth in the second half of 2023 slightly exceeded forecasts thanks to robust growth in the US and certain emerging economies. The International Monetary Fund (IMF) sees this development continuing this year, and last week raised its forecast for global economic growth from 2.9 % last October to 3.1 %. The IMF forecast for global growth next year remained at 3.2 %. The Organisation for Economic Cooperation and Development (OECD) and World Bank also recently released updated forecasts. The World Bank forecast, the most pessimistic of the three, sees the global economy growing by 2.4 % this year and 2.7 % next year. The OECD forecast, which occupies the middle ground, anticipates global growth of 2.9 % this year and 3.0 % next year. All forecasts reflect a slowdown in global growth from recent historical levels. During 2000–2019, for example, global growth averaged 3.8 % a year.

Growth below the long-term trend reflects efforts in many countries to restrain inflation through tightened monetary policies that typically cool economic activity. The combination of higher interest rates and increased public borrowing has exacerbated the debt struggles of emerging economies with poor credit ratings. Besides tight monetary policy, slowing global growth also reflects stricter fiscal policies in many countries and the lack of productivity gains.

All three of the big institutional forecasts are consistent in their outlooks for Chinese economic growth. Forecasts for this year range between 4.5 % and 4.7 %, and the outlooks for 2025 between 4.1 % and 4.3 %. The Chinese economy continues to be weighed down by problems in the real estate sector and weak consumer demand. The IMF expects the Russian economy to grow by about 2.6 % this year, noting that much of this growth will come from higher military spending and strong private consumption fed by a rapid rise in real wages. The forecasts of the OECD (1.8 %) and World Bank (1.3 %) are more modest. All three forecasters put Russian growth next year at around 1 %.

Growth in world trade has also been tepid. Goods trade contracted last year for the first time in 20 years outside recession periods. It has been hit by weak global demand and particularly feeble investment growth. The lifting of covid restrictions stimulated services trade, putting world trade growth last year into positive territory (about 0.4 %). Growth in goods trade this year is expected to return to growth, so world trade overall should grow by 2.3 % based on the World Bank forecast or 3.3 % based on the IMF forecast. For next year, the World Bank forecasts growth of 3.1 % and the IMF 3.6 %. World trade growth, however, will remain well below the average of 4.7 % per year during 2000–2019.

Downside risks to the global economy predominate. Further escalation of Middle East conflicts could depress international trade and drive up commodity prices. There is also a risk of new geopolitical tensions emerging elsewhere. These could manifest as actual conflicts or increased fragmentation of the global economy. Fragmentation could lead, for example, to restrictions on international trade or capital movements. Moreover, even if inflation is brought back down in many economies, uncertainty about its evolution this year will persist. Inflation in services prices, in particular, is still relatively high in many countries. If inflation turns out to be more stubborn than forecast, the normalisation of monetary policy could be further delayed. On the other hand, if inflation falls faster than expected, it would give authorities room to ease monetary policy sooner. In any case, China is so crucial to the global economy that any change in its growth pattern inevitably alters the outlook for the global economy.

IMF forecasts for the global economy and world trade growth (%). (IMF October 2023 forecast figures in parentheses.)

Source: IMF World Economic Outlook.