The International Monetary Fund (IMF) has released a concerning update on the global economy, highlighting significant challenges even after the end of the Covid-19 pandemic and the crisis triggered by Russia’s invasion of Ukraine.
According to the “World Economic Outlook” report, countries are gradually recovering, but many challenges still persist, according to Pierre-Olivier Gourinchas, chief economist at the IMF.
The “World Economic Outlook” (WEO) is one of the most important publications of the International Monetary Fund (IMF). It provides detailed analysis and forecasts on the global economy, including prospects for economic growth, inflation, balance of payments, exchange rates, and other important economic variables.
The WEO is published twice a year, coinciding with the semi-annual meetings of the IMF and the World Bank. The publication is based on comprehensive analysis of global economic data, including information collected from member countries, international organizations, and other reliable sources.
In addition to economic forecasts, the WEO also offers detailed analysis on specific economic topics that are relevant to the global economy. These may include issues such as fiscal policies, monetary policies, economic development, income inequality, international trade, among others.
The WEO is widely used by governments, financial institutions, businesses, and academics as a reliable source of information and analysis on the global economy. Its forecasts and analyses influence economic policies and investment strategies worldwide.
It is important to note that, while the WEO is highly respected and widely used, economic forecasts are subject to uncertainties and risks, and actual economic conditions may differ from the forecasts made in the report. However, the WEO remains a valuable tool for understanding trends and challenges in the global economy.
According to the IMF, there are four aspects on which countries should focus:
- Decline in Economic Growth
The decline in economic growth, also known as economic slowdown or recession, is a situation in which a country’s economy experiences a decline in the rate of growth of Gross Domestic Product (GDP), which is the most common measure of a country’s economic performance.
There are several reasons that can lead to a decline in economic growth, such as global slowdown, restrictive monetary policy, restrictive fiscal policy, external shocks, excessive indebtedness, low productivity, among others.
Economic slowdown can have several negative consequences, such as increased unemployment, reduction in household income, decrease in business profits, increase in poverty and social inequality. Therefore, governments often implement policies to stimulate economic growth, such as reducing interest rates, increasing public spending, tax incentives, and structural reforms to improve productivity and competitiveness of the economy.
The global economy faces the prospect of slower growth in 2023 and 2024 compared to 2022, with projections indicating a slowdown from 3.5% to 3% in both years. This slowdown is attributed to tightening monetary policies to combat inflation, mainly in developed economies. While emerging countries, especially in Asia, are expected to accelerate their growth, Latin America and the Caribbean face a more pronounced decline.
- Inflation Challenge
Inflation is a fundamental concept in economics that refers to the general and continuous increase in prices of goods and services in an economy over time. It is generally measured through price indices, such as the Consumer Price Index (CPI) or the Wholesale Price Index (WPI), which track the variation of prices of a representative basket of goods and services. Maintaining inflation under control is one of the main goals of economic policy for most governments. Excessive inflation can have negative effects on the economy, including reducing consumers’ purchasing power, business and investment uncertainty, and distortions in resource allocation. On the other hand, very low inflation or deflation (general price decline) can also be problematic, as it can lead consumers to postpone their purchases in anticipation of even lower prices in the future, which can slow economic activity. Therefore, central banks and monetary authorities generally seek a balance, aiming for a stable and moderate inflation rate over time. In many countries, the inflation target is around 2% to 3% per year.
Reducing inflation is another global challenge highlighted by the IMF. Although consumer inflation rates have decreased compared to the previous year, core inflation (which excludes volatile products such as food and energy) remains high in advanced economies, pointing to continued inflationary pressures.
- Ensuring Financial Stability
Financial stability is a condition in which the financial system of an economy is able to function efficiently and resiliently, without significant disruptions that may cause economic or financial crises. It is essential to promote sustainable economic growth and protect the integrity of the financial system.
Financial stability covers various dimensions: Stability of the banking system, stability of the financial market, macroeconomic stability, stability of the payment system, regulatory stability, and effective supervision.
Maintaining financial stability is an ongoing challenge that requires cooperation among governments, central banks, financial regulators, international institutions, and the private sector. Failure to ensure financial stability can result in devastating economic crises, such as the global financial crisis of 2008, which highlighted the critical importance of this goal for the health and resilience of modern economies.
The IMF warns of the need to ensure financial stability, especially after turbulence in some banking institutions in the US and Switzerland. Central banks should continue to focus on price stability and strengthen financial supervision and risk control, while governments should build fiscal buffers to support the most vulnerable.
- Purchasing Power Recovery
Purchasing power is the ability of a consumer to acquire goods and services with a certain amount of money. In other words, it is the quantity of goods and services that can be purchased with a certain amount of currency.
Purchasing power is directly related to the price level of goods and services in an economy. If prices are low, purchasing power will be higher, as the same amount of money will allow to acquire more products. On the other hand, if prices are high, purchasing power will be lower, as the same amount of money will allow to acquire fewer products.
Inflation is an important factor that affects purchasing power. When prices increase over time (inflation), the purchasing power of the currency decreases, as the same amount of money buys fewer goods and services. On the other hand, if prices decrease (deflation), the purchasing power of the currency increases, as the same amount of money can buy more goods and services.
This is an important measure to assess the standard of living and economic well-being of a population. An increase in purchasing power means that consumers can acquire more goods and services, improving their standard of living. On the other hand, a decrease in purchasing power can lead to a reduction in the standard of living and economic well-being of people.
Therefore, economic policies aimed at maintaining price stability, such as inflation control, are important to ensure stable purchasing power and promote sustainable economic growth.
Despite the challenges, there is a positive outlook regarding the recovery of purchasing power, with forecasts of real wage increases, especially if labor markets remain strong. This may mean relief for workers worldwide, although a balance is needed to avoid inflationary pressures.
Although there are signs of recovery, the IMF highlights the importance of remaining vigilant in the face of global economic challenges, adopting effective policies to ensure sustainable and inclusive economic recovery.
IMF:
The IMF is an international organization established in 1944 during the Bretton Woods Conference, held after World War II. Its main objective is to promote global monetary cooperation, ensure financial stability, facilitate international trade, promote employment and sustainable economic growth, and reduce poverty around the world.
The IMF acts as an economic stabilization fund for member countries facing balance of payments problems. This means that it provides temporary loans and credit conditions to help countries overcome financial difficulties and implement policies that can restore economic stability.
In addition, it plays a crucial role in monitoring and analyzing global economies, providing policy advice and technical assistance to member countries. It also conducts economic research and produces reports on economic and policy trends worldwide.
IMF member countries contribute financial resources, called quotas, which determine their participation and influence in the organization’s decisions. Important decisions at the IMF are made by the Board of Governors, which represents all member countries, and by the Executive Board, composed of 24 members.
Although the IMF has been criticized for some of its policies and approaches over the years, it remains a fundamental institution in the international financial system, playing an essential role in promoting global economic stability.
