The global economy has made progress in the battle against high inflation but the International Monetary Fund warns it’s still too early to celebrate.
In a fresh set of economic forecasts, the IMF shaved 0.2 percentage points off its expectations for global inflation in 2023 compared to projections made three months earlier.
It predicts inflation declining from 8.7 per cent in 2022 to 6.8 per cent this year, reaching 5.2 per cent in 2024.
IMF director of research Pierre-Olivier Gourinchas said global inflation pressures had eased faster than expected, with energy and food prices down sharply from their war-induced peaks.
“The COVID-19 health crisis is officially over and supply-chain disruptions have returned to pre-pandemic levels,” he said.
The outlook for growth is also looking more upbeat, with the international institution expecting to upgrade its forecast for 2023 by 0.2 percentage points compared to April projections.
Economic activity is still expected to slow from 3.5 per cent in 2022 to 3.0 per cent in both 2023 and 2024.
Professor Gourinchas welcomed stronger growth and lower inflation as signs of a global economy tracking in the right direction.
“Yet many challenges still cloud the horizon and it is too early to celebrate,” he said.
While many risks have simmered down, such as stress in the financial sector, the balance remains tilted to the downside.
The IMF warned core inflation, which excludes volatile energy and food prices, had proved stubbornly high and well above central bank targets.
Major central banks have indicated they will need to tighten monetary policy further in response to persistent core inflation.
Tight labour markets and their influence on wages could become more of a problem, although the IMF noted wage-price spirals have not taken hold in most countries.
The institution also flagged the possibility of El Nino bringing more extreme temperatures and pushing up commodity prices.
Other downside risks include a slowdown in global activity in response to tighter monetary policy, with the lacklustre recovery in China a potential problem.
Treasurer Jim Chalmers said the report highlighted the tricky road ahead for the world economy.
“The IMF emphasises the need to rebuild fiscal buffers – something the Albanese government has done with its responsible approach to the budget,” Dr Chalmers said.
As well as recommending governments rebuild fiscal buffers, the IMF also encouraged central banks to stay committed to bringing down inflation and communicate that clearly.
The institutions suggested keeping interest rates in restrictive territory until there were clear signs that underlying inflation was cooling.
(Australian Associated Press)