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Pierre-Olivier Gourinchas, chief economist and director, Research Department of the IMF, speaking at a press conference in Marrakech, Morocco on Tuesday, Oct. 10, 2023.
Pierre-Olivier Gourinchas, chief economist and director, Research Department of the IMF, speaking at a press conference in Marrakech, Morocco on Tuesday, Oct. 10, 2023.

By Kenton X. Chance

Marrakech, MOROCCO (CMC) — The International Monetary Fund (IMF) Tuesday released its World Economic Outlook amidst fresh fighting between Israel and Gaza that could result in higher food and fuel prices for struggling regions like the Caribbean even as the global economy is still “limping along”.

The outlook, dubbed “Navigating Global Divergences”, was released as part of the IMF’s annual meetings being held under the theme “Reinvigorating Global Cooperation”.

“Medium term growth prospects have weakened since the global financial crisis, especially for emerging markets and developing economies,” Pierre-Olivier Gourinchas, chief economist and director, Research Department of the IMF, said at a press conference here to launch the report.

“The implications for these countries are profound,” he told the meeting which is being held through Oct. 15, representing the first time in 50 years that the IMF’s annual meetings are being held in Africa.

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Gourinchas said lower economic growth in developing countries also means a much slower divergence towards the living standards of advanced economies.

It also reduces fiscal space, increases debt vulnerabilities and exposure to shocks and diminishes opportunities to overcome the scarring from from the pandemic and the war in Ukraine.

“With lower growth and higher interest rates and reduced fiscal space, structural reforms of the right time, at the right time become key. Higher long term growth can be achieved through a careful sequence of reforms, especially those focused on governance, business regulations, and the external sector.”

He said that these first generation reforms help unlock growth and make subsequent reforms — whether to credit markets or labor markets, or for the green transition — much more effective.

“The weaker growth prospects also reflect the rising incidence of climate risk with increased frequency of large natural disasters, and rising geo-economic fragmentation such as the trade tensions leading to US-China decoupling,” the IMF official said.

He said that the IMF is saddened by the loss of lives in the Israel-Gaza conflict and is monitoring the situation very carefully in terms of  the economic impact it could have on the region and  beyond.

“I think we have to be cautious. I think it too early to really assess what the impact might be,” he said, noting that the conflict erupted after the current projections were closed.

“But we would have to wait a little bit before seeing what the impact might be. Of course, we all hope for a rapid de-escalation of the conflict and to the violence,” Gourinchas said.

Asked to comment on the impact of the conflict and oil price and the disinflation process, Gourinchas said the IMF has observed that oil prices had increased by four per cent over last few days.

“And, of course, this is something that we see often in situations where there is geopolitical instability in the region. We see spikes in the energy prices and oil prices. We’ve seen that in previous crises and previous conflicts,” he said.

“And of course, this reflects the potential risk that there could be disruptions either in production or transport of oil in the region,” he further stated even as he emphasised that it is a bit too early to assess how much of  those movements in oil prices are going to be sustained.

“The work we’ve done in the research department at the fund suggests that if there is something like a 10 per cent increase in oil prices, this would weigh down on global output by about 0.15 per cent in the following year, and will increase global inflation by about 0.4 percentage points.

“So that gives you a rough idea of what the magnitude could be. But again, I emphasise that it’s really too early to jump to any conclusion here,” Gourinchas  said.

‘so much drift, so much war, so much confusion’

On Sunday, St. Vincent and the Grenadines Prime Minister,Ralph Gonsalves noted the emerging Israel-Gaza conflict, the first between the two states in over a decade.

“… There’s so many challenges in the world. There’s so much drift, so much war, so much confusion. I mean, we see what is happening now between Israel and the Palestinians, Hamas in Gaza,” said Gonsalves, who is the longest serving head of state in the Caribbean Community (CARICOM), a 15-member political union.

“Of course, it connects with all the Palestinians everywhere in the Arab world. Ukraine is still there, continuing like a war without end. We see this the terrible deterioration of relations between two Commonwealth countries, two of our close friends, India and Canada, we see the issue between Venezuela and Guyana, two of our friends and  that has potential for a real disturbance because it may involve external partners too of one kind or another,” Gonsalves said.

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Prime Minister of St. Vincent and the Grenadines in a September 2023 photo.

‘growth remains slow and uneven’

Meanwhile, in presenting the Global Economic Outlook, Gourinchas said the global economy continues to recover from the pandemic and Russia’s invasion of Ukraine, showing remarkable resilience.

“Yet growth remains slow and uneven. The global economy is limping along; not sprinting. Under our baseline forecast, growth will slow from 3.5 per cent last year to three per cent this year, and 2.9 per cent next year — a 0.1 percentage point downgrade for 2024,” he said.

He said the growth rate remains well below historical averages. “Important divergences are appearing. The slow down is more pronounced in advanced economies and in emerging markets in developing economies.”

He said that among advanced economies, the United States has been revised up with resilient consumption and investment while the euro area has been revised down as tighter monetary policy and the energy crisis took a toll.

“There is divergence also among emerging markets in developing economies,” Gourinchas said, adding that China faces growing headwinds while India and Russia are revised up.

“The news of inflation is encouraging but we’re not quite there yet. Headline inflation continues to decelerate, core inflation, excluding food and energy prices is also projected to decline but more gradually. However, all in all, most countries are not expected to return inflation targets until 2025.”

He said commodity prices could become more volatile with increasing climate and geopolitical shock.

“This will represent a serious risk to the disinflation strategy,” he said, noting that between June and September, oil prices  increased by about 27 per cent on the back of extended supply cuts from OPEC countries, before going back more recently by about eight per cent.

Gourinchas pointed out that food prices remain elevated and could be disrupted further by an escalation of the war in Ukraine and inflation remains uncomfortably high.

“Near term inflation expectations have risen markedly above target. Bringing these expectations back down is critical to winning the battle against inflation.”

He said fiscal buffers have eroded in many countries with elevated debt levels, rising funding costs, slowing growth and an increasing mismatch between the growing demands on the state and available fiscal resources,” adding “this leaves many countries more vulnerable to crises”.

He told the media that  despite the tightening of monetary policy, financial conditions have eased in many countries.

Global economy must renew focus on managing fiscal risks

On the fiscal front, the IMF said the global economy must renew focus on managing fiscal risks, adding that buffers

“… buffers need to be rebuilt, including by phasing out of energy subsidies while still protecting the vulnerable.”

The IMF official said fiscal and monetary policies pulled in the same direction last year, which helped the disinflation process, but this alignment has weakened.

Responding to a question about the IMF position on monetary policy, Gourinchas acknowledged that a number of regions in the world have seen a huge increase, in particular in the price index coming from the energy index for some countries’ food prices.

“Now, does that mean that there is no role for monetary policy? The answer is no. Why? Because these shocks to headline inflation tend to feed into more broader measures of inflation.”

He said the shocks first hit the energy bill.

“But then, energy bill is part of the production costs for businesses. It’s part of the living expenses for workers. So then it leads to higher demand for wages. It leads to higher prices for businesses, then it gets into underlying measures of inflation,” Gourinchas explained.

“And what is really important for monetary policy is to make sure that the underlying measurement of inflation are going to be coming down,  and if this is not contained then it gets into measures of expectations of inflation, you see inflation high for a while you come to expect inflation to be high for a while and then it becomes almost self sustaining.”

He said monetary policy has a role to play in order to make sure that those inflation expectations and underlying measures of inflation are contained, even if the source of the shock could be on the energy side.

“And this is why our recommendation for central banks around the world, in the face of a fairly persistent energy price shock, is that they needed to tighten monetary policy and this is showing its effect already in the world economy. It’s been cooling off global output for sure but it’s also showing signs it’s bringing down inflation, bringing it back down to central banks targets,” Gourinchas told reporters.

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