The International Monetary Fund (IMF) has announced an updated baseline forecast for global output growth this year, expecting growth of 2.8% this year, before rising to 3% in 2024.

The latest prediction is 0.1 percentage points lower than the IMF predicted in January and compares with a 3.4% global growth rate in 2022.

The organisation says the world economy is still recovering from the unprecedented upheavals of the last three years and the recent banking turmoil in certain markets has added to uncertainties.

Advanced economies are expected to see an especially pronounced growth slowdown from 2.7% in 2022 to 1.3% this year.

In a plausible alternative scenario with further financial sector stress, global growth declines to about 2.5%, with advanced economy growth falling below 1%.

The IMF expects the sub-Saharan African region to grow its economy by 3.6% this year, following a growth rate of 3.9% in 2022, before rising to 4.2% in 2024.

Global headline inflation is set to fall from 8.7% in 2022 to 7% this year on the back of lower commodity prices but underlying core inflation is proving to be stickier.

“Importantly, this outlook assumes that recent financial stresses remain contained,” says IMF chief economist Pierre-Olivier Gourinchas.

Much uncertainty clouds the short- and medium-term outlook as the global economy adjusts to the shocks of 2020 to 2022 and the recent financial sector turmoil. Recession concerns have gained prominence, while worries about stubbornly high inflation persist.

“Once again, risks are heavily tilted to the downside - they have risen with the recent financial turmoil. Most prominently, recent banking system turbulence could result in a sharper and more persistent tightening of global financial conditions.

“The simultaneous rate hikes across countries could have more contractionary effects than expected, especially as debt levels are at historical highs. There might be a need for more monetary tightening if inflation remains stickier than expected,” Gourinchas explains.  

He adds that these risks and more could all materialize at a time when policymakers face much more limited policy space to offset negative shocks, especially in low-income countries.

With the fog around current and prospective economic conditions thickening, policymakers have a narrow path to walk towards restoring price stability while avoiding a recession and maintaining financial stability.

Achieving strong, sustainable and inclusive growth will require policymakers to stay agile and be ready to adjust as information becomes available.

“First, as long as financial stress is not systemic as it is now, the fight against inflation should remain the priority for central banks. Second, to safeguard financial stability, central banks should use separate tools and communicate their objectives clearly to avoid unwarranted volatility.

“Financial policies should remain laser focused on preserving financial stability and watch for any buildup of risks in banks, non-banks, and the real estate sectors,” Gourinchas notes.

Moreover, in many countries, fiscal policy should tighten to ease inflation pressures, restore debt sustainability and rebuild fiscal buffers.

In the event of capital outflows that raise financial stability risks, emerging market and developing economies should use the integrated policy framework, combining temporary targeted foreign exchange interventions and capital flow measures where appropriate, Gourinchas concludes.