IMF lowers global growth forecast, US inflation expected to ease

IMF revises global growth forecast downward, citing inflation, financial turmoil, and geopolitical tensions

By Ahmed Azzam | @3zzamous | 12 April 2023

  • IMF revises global growth forecast downward, US economy expected to grow slightly higher, while Germany and UK forecasted to decline in GDP

  • Federal Open Market Committee prioritizes price stability amid banking sector turmoil, while some officials suggest a pause

  • Minneapolis President Neel Kashkari warns against changing the Fed's 2% inflation goal, and other officials recommend another rate hike followed by a pause

What’s happened?

The International Monetary Fund (IMF) has revised its global growth forecast lower for 2023 and 2024, citing the need for tight policy stances to combat inflation, the impact of financial conditions, the ongoing conflict in Ukraine, and growing geoeconomic fragmentation. The IMF's April World Economic Outlook report also noted increased uncertainty due to recent financial sector turmoil. While the US economy is expected to grow 1.6% in 2023, slightly higher than previously forecasted, Germany's GDP is expected to fall 0.1% compared to earlier projections of a 0.1% rise, and the British economy is expected to shrink 0.3% compared to a 0.6% drop seen in January. The IMF also projects global inflation to decrease to 7% this year from 8.7% in 2022, but core CPI is likely to decline more slowly.

What to watch?

Investors may get some relief on inflation as US CPI growth is expected to slow in March, according to consensus forecasts. However, any year-on-year increase exceeding February's 6% advance could result in a drop in the S&P 500, while meeting or trailing the 5.1% expectation may lead to a rise in stocks. Nevertheless, the OPEC+ output cuts could temper the respite.

The minutes of the Federal Open Market Committee's March 21-22 meeting is expected to show continued prioritization of price stability amid turmoil in the banking sector. Despite robust growth in spending and income and a tight labor market, officials likely considered scenarios for both the path of rates and quantitative tightening (QT) to signal their commitment to controlling prices, with some possibly suggesting a pause until the extent of the turmoil became clearer.

Minneapolis President Neel Kashkari, a voter this year, said that signs of calm are being restored after last month's banking sector turmoil, but did not comment specifically on policy direction. He warned that changing the Fed's 2% inflation goal would damage its credibility. Meanwhile, John Williams and Patrick Harker have recommended another hike followed by a pause, with Harker cautioning against continued upward pressure on rates followed by a sudden drop.