IMF adjusts growth downward linking anaemic outlook to high inflation and recent financial sector shocks

The International Monetary Fund (IMF) has adjusted downwards its economic growth forecast for Latin America and the Caribbean and warned of a continued rocky road to economic recovery with heightened risks as a result of recent banking turmoil.

In January, the IMF had estimated growth of 1.8 per cent for the region in 2023, following the estimated growth of 3.9 per cent last year. That forecast has now been put at 1.6 per cent for this year.

In its latest World Economic Outlook – A Rocky Recovery – the IMF estimated growth of 4.9 per cent for Barbados this year and 3.9 per cent next year. It predicted that inflation in Barbados will fall slightly from the estimated 9.4 per cent last year to 6.9 per cent this year.

The fund said global economic growth is expected to drop to 2.8 per cent this year, from the 3.4 per cent witnessed last year. It is estimating global growth of 3 per cent in 2024 representing its lowest medium-term forecast in decades.

“The anaemic outlook reflects the tight policy stances needed to bring down inflation, the fallout from the recent deterioration in financial conditions, the ongoing war in Ukraine and growing geoeconomic fragmentation,” it said in the report released on Tuesday.

The Washington-based institution cited high inflation and recent financial sector shocks as the main contributors to the slowdown in economic growth this year.

It said: “Although inflation has declined as central banks have raised interest rates and food and energy prices have come down, underlying price pressures are proving sticky, with labour markets tight in a number of economies.

“Risks to the outlook are heavily skewed to the downside, with the chances of a hard landing having risen sharply. Financial sector stress could amplify and contagion could take hold, weakening the real economy through a sharp deterioration in financing conditions and compelling central banks to reconsider their policy paths,” the IMF explained.

“Pockets of sovereign debt distress could, in the context of higher borrowing costs and lower growth, spread and become more systemic. The war in Ukraine could intensify and lead to more food and energy price spikes, pushing inflation up. Core inflation could turn out more persistent than anticipated, requiring even more monetary tightening to tame,” it warned.

The IMF noted that the side effects from the fast rise in policy rates were becoming apparent, as banking sector vulnerabilities have come into focus and fears of contagion have risen across the broader financial sector, including non-bank financial institutions.

It further noted that the major forces that shaped the global economy last year seemed set to continue into this year, but with different intensities.

“Debt levels remain high, limiting the ability of fiscal policymakers to respond to new challenges. Commodity prices that rose sharply following Russia’s invasion of Ukraine have moderated, but the war continues, and geopolitical tensions are high,” the fund said.

“Infectious COVID-19 strains caused widespread outbreaks last year, but economies that were hit hard – most notably China – appear to be recovering, easing supply-chain disruptions. Despite the fillips from lower food and energy prices and improved supply-chain functioning, risks are firmly to the downside with the increased uncertainty from the recent financial sector turmoil.” it added.

The latest IMF report indicated that while emerging markets and developing economies were “powering ahead in many cases”, turbulence was building below the surface and the situation was therefore “quite fragile”.

“While global inflation has declined, that reflects mostly the sharp reversal in energy and food prices. But core inflation, excluding the volatile energy and food components, has not yet peaked in many countries,” it said.

The report also raised concern that an increase in wages and salaries continued to trail rising inflation even as corporate margins have “surged” in recent years.

More worrisome, said the IMF, was the sharp policy tightening of the past 12 months that was starting to have serious side effects for the financial sector.

“We are therefore entering a perilous phase during which economic growth remains low by historical standards and financial risks have risen, yet inflation has not yet decisively turned the corner.

“More than ever, policymakers will need a steady hand and clear communication. The appropriate course of action is contingent on the state of the financial system. As long as the latter remains reasonably stable, as it is now, monetary policy should stay firmly focused on bringing inflation down,” it warned.

Adding that policymakers had a narrow path to walk to improve prospects and minimise risks, IMF officials also cautioned that “in most cases, governments should aim for an overall tight stance while providing targeted support to those struggling most with the cost-of-living crisis”.

marlonmadden@barbadostoday.bb