Prospects for the global economy are improving, as worst fears fade


The outlook for the global economy in recent weeks has unexpectedly brightened, with the United States, Europe and China exceeding expectations and avoiding – at least for now – some predicted stumbles.

US employers continue to hire at a steady pace, while the latest European manufacturing gauges signal expansion and Chinese consumers are spending again.

However, much of the improvement in the world’s three main economic engines is more the result of averted disasters than any new boom.

In the United States, the Federal Reserve’s fastest rate hikes in 40 years have yet to push the economy into recession, as employers such as Boeing and Chipotle plan to hire thousands of new workers. Energy shortages that some feared would suffocate European factories have not materialized because of relatively mild winter weather. And China’s leaders abruptly freed their economy from severe Covid restrictions in December, months earlier than investors expected.

“The forecast is less gloomy than in our forecast for October,” Pierre-Olivier Gorinches, the chief economist of the International Monetary Fund, told reporters. “We don’t see a global recession right now.”

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In an updated forecast released Monday, the fund now expects global growth of 2.9 percent this year, slower than last year’s pace but up 0.2 percentage points from the October estimate. Inflation in the world is supposed to decrease this year to 6.6% compared to the global average of 8.8% last year.

In the United States, where most forecasters still see a recession as early as this spring, policymakers may be able to steer the overheated economy into a “soft landing” — bringing inflation under control without plunging into a recession, the International Monetary Fund said. By 2024, the fund expects the US economy to expand barely, as prices cool and the unemployment rate will peak at 5.2%, up from 3.5% today.

“We still see a narrow path where a recession can be avoided,” Gorinches said.

The International Monetary Fund also dropped its October forecast that a third of all countries would sink into recession by the end of this year, although some prominent economies would disappoint.

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As it absorbs the costs of leaving the European Union, Britain’s economy will be smaller at the end of 2023 than it was a year ago, according to the International Monetary Fund. Britain is struggling with high inflation and a job market that has not yet returned to its pre-pandemic level.

“The UK is facing quite a challenging environment,” Gorinches said.

The fund’s rosier global outlook comes as central banks in the United States, Europe and England are expected to raise interest rates this week to continue the fight against inflation. The Federal Reserve may raise its lending rate by a quarter point; Investors are expecting half a point moves from the European Central Bank and the Bank of England.

Investors will also get fresh data on the performance of major economies, starting with the release of fourth-quarter growth figures for the eurozone on Tuesday. Friday brings the US jobs report for January.

On Monday, the European Commission’s economic sentiment indicator rose for a third month while its employment expectations reading rose for the second straight month. The figures “increased markedly” in France, Germany, Italy and Spain, the commission said.

The Oxford Economics survey conducted this month among global business executives also identified a trend of improving confidence. Nearly half of those surveyed said they had become more optimistic over the past month, about twice as many as described themselves as more modest, according to the London-based investment firm.

Concerns about a severe energy crisis in Europe, weaned off dependence on Russian natural gas supplies, have eased, according to the survey of companies that collectively employ about 6 million people and have revenues of $2 trillion, Oxford said.

Europe’s ability to cope with the loss of Russian gas is key to improving the fortunes of the global economy, according to Christian Keller, head of economic research at Barclays. Thanks to conservation efforts and mild weather, Europe’s gas storage facilities are now nearly 74% full, compared to a five-year average for this time of year of around 55%.

“What it did is it really removed the risk of energy rationing in Europe. It was really a sword of Damocles hanging over Europe,” Keller said.

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In countries using the euro, the easing of energy cost pressure contributed to consecutive monthly declines in inflation, which remained high at 9.2%. Amid signs that inflation has peaked in both the United States and Europe, investors are less concerned that major central banks may need to raise borrowing costs higher than currently planned, he said.

Still, in a reminder of the uncertainty that overshadows any positive outlook, the German government reported on Monday that its economy shrank in the last three months of the year by 0.2% from the previous quarter, an unexpected drop.

China’s sudden reopening — after nearly three years of draconian Covid restrictions — also jolted global capital. Although the revival of consumer and business activity there will take time, the early signs are positive.

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Holiday trips by Chinese consumers to celebrate the Lunar New Year this month are up 74 percent from 2022, according to state-owned Xinhua news service. China’s comeback will also be good news for European commodity producers and exporters, Keller said.

“Most indications are that December was the trough and now you have the reopening of the world’s second-largest economy. That’s good news for global growth, period,” he said.

Some analysts fear that China’s rebound could raise global oil prices, complicate the fight against inflation and force central banks to keep raising interest rates. But even as Chinese factories and power plants gobble up oil, demand will fall elsewhere as global activity slows from last year, according to the International Monetary Fund, which expects oil prices to fall later this year.

To be sure, many risks loom, Gorinches said. The outbreak of the corona virus in China could flare up in unexpected ways or the property sector in the country with heavy debts, which make up about 25% of the economy, could fall into the expected crisis. Inflation may turn out to be stubborn, forcing the central banks to raise interest rates and thus increasing the chances of a recession. An escalation of the war in Ukraine could raise global energy and food prices again.

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The fund’s sister institution, the World Bank, has a much gloomier view. Earlier this month, the bank cut the global growth forecast to only 1.7%, down from 3% last June. Sharp and sustained interest rate hikes by the major central banks, along with worsening financial conditions and spillovers from the war, explained the downgrade, the bank said.

Gourinchas said the rival forecasts are based on different analytical methodologies. The International Monetary Fund uses a concept called “purchasing power parity”, which tries to eliminate distortions in comparisons between countries caused by currency values, while the bank relies on market exchange rates. The result is that the bank gives less weight to emerging market economies such as China and India, which the fund says will account for about 50% of global growth this year.

The bank is also more pessimistic about the outlook for advanced economies, especially Europe, which it says will be severely affected by the rise in interest rates and energy disruptions.

The International Monetary Fund, however, sees the glass as half full.

“The coming year will still be challenging,” Gorinches said. “But this could certainly represent the turning point, with a decrease in growth and a decrease in inflation.”

The emerging economic rise appears in us company profits. Tractor Supply, an outdoor-focused retailer, reported last week that same-store sales rose nearly 9 percent in the fourth quarter.

“Our operating assumption is that in the near-to-medium term the economy will remain resilient with flat to moderate real growth. Wages are growing and consumers continue to draw on pent-up savings to support spending,” CEO Hal Lawton told investors on Jan. 26.

Also, Rockwell Automation, a maker of automated manufacturing equipment, reported quarterly sales of nearly $2 billion, up nearly 7% over the same period last year. The company’s profit margins increased, and it raised its guidance for its full-year results, with CEO Blake Mort noting “the continued strength of demand from our customers across all sectors and business areas.”


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