The outlook for the global economy in recent weeks has unexpectedly brightened, with the United States, Europe and China all outperforming expectations and avoiding — at least for now — some predicted stumbles.
Much of the improvement in the world’s three main economic engines, however, is more the result of disasters averted rather than any new boom.
In the United States, the Federal Reserve’s fastest interest rate increases 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 strangle European factories have not materialized because of relatively mild winter weather. And Chinese leaders abruptly freed their economy from harsh covid restrictions in December, months earlier than investors anticipated.
“The outlook is less gloomy than in our October forecast,” Pierre-Olivier Gourinchas, chief economist for the International Monetary Fund, told reporters. “We are not seeing a global recession right now.”
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 its October assessment. Inflation worldwide should drop to 6.6 percent this year from a global average of 8.8 percent last year.
In the United States, where most forecasters still anticipate a recession as soon as this spring, policymakers may be able to steer the overheated economy to a “soft landing” — bringing inflation under control without plunging into a downturn, the IMF said. By 2024, the fund expects the U.S. economy to be barely expanding, with prices cooling and the jobless rate peaking at 5.2 percent, up from today’s 3.5 percent.
“We’re still seeing a narrow path where a recession can be avoided,” Gourinchas said.
The IMF also has dropped its October prediction that one-third of all countries would sink into recession by the end of this year, though some notable economies will disappoint.
As it absorbs the costs of its exit from the European Union, the economy of the United Kingdom will be smaller at the end of 2023 than it was one year ago, according to the IMF. The U.K. is struggling with high inflation and a labor market that has not yet regained its pre-pandemic level.
“The U.K. is facing a quite challenging environment,” Gourinchas 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 anti-inflation fight. The Federal Reserve is likely to lift its benchmark lending rate by a quarter point; investors expect half-point moves from the European Central Bank and the Bank of England.
Investors also will get fresh data on the performance of major economies, starting with Tuesday’s release of euro zone fourth-quarter growth figures. Friday brings the U.S. jobs report for January.
On Monday, the European Commission’s economic sentiment indicator rose for a third month while its employment expectations reading increased for the second month in a row. Figures “increased markedly” in France, Germany, Italy and Spain, the commission said.
This month’s Oxford Economics survey of global business executives has also detected a trend of improving confidence. Almost half of those surveyed said they have become more optimistic over the past month, roughly twice the share describing themselves as more downbeat, according to the London-based investment firm.
Worries over a serious energy crisis in Europe, which is weaning itself from a dependence on Russian natural gas supplies, have eased, according to the survey of companies that collectively employ about 6 million people and have revenue of $2 trillion, Oxford said.
Europe’s ability to cope with the loss of Russian gas is key to the global economy’s improving fortunes, according to Christian Keller, head of economics research for Barclays. Thanks to conservation efforts and mild weather, European gas storage facilities are now nearly 74 percent full, compared with a five-year average at this time of year around 55 percent.
“What that has done is it has really removed a risk of, potentially, energy rationing in Europe. That was really the Damocles sword hanging over Europe,” Keller said.
In countries that use the euro, the easing of energy cost pressure has contributed to consecutive monthly declines in inflation, which remains elevated at 9.2 percent. Amid signs that price increases have peaked in both the United States and Europe, investors are less worried that major central banks might need to raise borrowing costs higher than currently planned, he said.
Still, in a reminder of the uncertainty shadowing any positive forecast, the German government on Monday reported that its economy contracted in the final three months of the year by 0.2 percent from the previous quarter, an unexpected decline.
China’s sudden reopening — after nearly three years of draconian covid restrictions — also has jolted global fortunes. While the revival of consumer and business activity there will take time, early signs are positive.
Chinese consumers’ holiday travel to celebrate Lunar New Year this month rose 74 percent from 2022, according to the state-owned Xinhua news service. China’s comeback also will be good news for commodity producers and European exporters, Keller said.
“Most indications are that December was the trough and you now have the reopening of the second largest economy in the world. That is good news for global growth, full stop,” he said.
Some analysts worry that China’s rebound could drive up global oil prices, complicating the inflation fight and forcing central banks to keep raising interest rates. But even with Chinese factories and power plants gobbling oil, demand will be falling elsewhere as global activity slows from last year, according to the IMF, which expects oil prices to decline over the course of the year.
To be sure, plenty of risks threaten, Gourinchas said. China’s covid outbreak could flare up in unpredictable ways or the country’s heavily indebted property sector, which accounts for roughly 25 percent of the economy, could tumble into a long-awaited crisis. Inflation could prove stubborn, forcing central banks to raise rates and thus increasing the chances of recession. An escalation of the war in Ukraine could again send global energy and food prices soaring.
The fund’s sister institution, the World Bank, has a much gloomier view. Earlier this month, the bank cut its forecast of global growth to just 1.7 percent, down from 3 percent last June. Sharp and continuing interest rate hikes by major central banks, coupled 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 IMF uses a concept called “purchasing power parity,” which tries to eliminate distortions in cross-country comparisons caused by currency values, while the bank relies on market exchange rates. The result is the bank gives less weight to emerging market economies such as China and India, which the fund says will account for roughly 50 percent of global growth this year.
The bank also is more pessimistic about the outlook for advanced economies, particularly Europe, which it says will be hard hit by rising interest rates and energy disruptions.
The IMF, in contrast, sees the glass as half full.
“The year ahead will still be challenging,” Gourinchas said. “But it could well represent the turning point, with growth bottoming out and inflation declining.”
The nascent economic uptick is showing up in U.S. corporate earnings. Tractor Supply, an outdoor-focused retailer, last week reported comparable store sales rose almost 9 percent in the fourth quarter.
“Our operating assumption is that the economy in the near-to-medium term will remain resilient with flat to modestly positive real growth. Wages are increasing and consumers continue to tap pent-up savings to support spending,” CEO Hal Lawton told investors Jan. 26.
Likewise, Rockwell Automation, a maker of automated manufacturing gear, reported quarterly sales of nearly $2 billion, up almost 7 percent from the same period last year. The company’s profit margin grew, and it raised its guidance for its full-year results, with CEO Blake Moret touting “the continued strength of our customers’ demand across all business segments and regions.”