“Global Economy to Face a More Difficult Year in 2023”: IMF Head Kristalina Georgieva

The IMF cut its forecast for global economic growth in 2023 in October, citing the ongoing drag from the Ukraine war, inflationary pressures, and the high-interest rates engineered by central banks such as the US Federal Reserve to counteract those prices pressures. Since then, China has abandoned its zero-COVID policy and begun a chaotic reopening of its economy, though consumers in the country remain cautious as coronavirus cases rise.

President Xi Jinping called for more effort and unity in his first public remarks since the policy change in a New Year's address on Saturday, as China enters a "new phase." China's growth in 2022 is likely to be at or below global growth for the first time in 40 years," Georgieva said. Furthermore, a "bushfire" of COVID infections expected in the coming months is likely to wreak havoc on the country's economy this year, weighing on both regional and global growth, according to Georgieva, who visited China on IMF business late last month. "I was in China last week, in a bubble in a city with no COVID," she explained. "However, once people start travelling, that will not last."

"It will be difficult for China in the coming months, and the impact on Chinese growth will be negative, the impact on the region will be negative, and the impact on global growth will be negative," she said. The IMF forecasted Chinese GDP growth last year at 3.2% in October, which was in line with the fund's global outlook for 2022.

It also predicted that annual growth in China would accelerate to 4.4% in 2023, while global activity would slow further. Her remarks, however, imply that another cut to both China and global growth forecasts is possible later this month, when the IMF typically releases updated forecasts during the World Economic Forum in Davos, Switzerland.

Meanwhile, the US economy, according to Georgieva, is standing out and may avoid the outright contraction that is expected to affect up to a third of the world's economies. The "U.S. is most resilient," she said, and it "may avoid recession. We believe the labour market will remain quite strong." However, this fact alone poses a risk because it may stymie the Fed's efforts to return US inflation to its target level after reaching its highest level in four decades last year. As 2022 came to a close, inflation appeared to have peaked, but by the Fed's preferred measure, it was still nearly three times the 2% target.

"This is a mixed blessing because if the labour market is very strong, the Fed may have to keep interest rates tighter for a longer period of time to bring inflation down," Georgieva explained. The Fed raised its benchmark policy rate from near zero in March to the current range of 4.25% to 4.50% last year, in the most aggressive policy tightening since the early 1980s, and Fed officials last month projected it will breach the 5% mark in 2023, a level not seen since 2007.

Indeed, the job market in the United States will be a central focus for Fed officials who want to see labour demand fall to help alleviate price pressures. The first week of the new year brings a slew of key employment data, including Friday's monthly nonfarm payrolls report, which is expected to show the US economy added 200,000 jobs in December and the unemployment rate remained at 3.7% - near the lowest since the 1960s.