(Yicai Global) Jan. 31 -- China and India, whose economies are expanding quickly, are likely to account for half of global economic growth this year, while Europe and the United States may face painful landings, Daniel Leigh, head of the World Economic Studies division in the IMF's Research Department, told Yicai Global in an interview.
The IMF yesterday raised its forecast for global economic growth this year to 2.9 percent from a prediction last October of 2.7 percent, while upgrading its annual projection for China to 5.2 percent.
Excerpts from the interview are published below:
Yicai Global: We face a challenging year with geopolitical tensions, rising inflation, global supply chain issues, and a lingering pandemic. Which is the most worrying?
Daniel Leigh: Those are all downside risks. Things could get worse than we expect. Unfortunately, we still worry more about things getting worse than getting better. The top three that we worry about now is China’s recovery stalling. Inflation is still very high in the world, more than 8 percent in 2022. It’s going to take a lot of pain to get it down. And the third one is the war in Ukraine, which could increase food and energy costs around the world.
YG: What is the bright spot for the world economy?
Leigh: The labor market. People that usually have a hard time finding work have got a job. They’ve seen their wages going up. There’s a sense of reopening coming back to tourism. We’ve seen travel bookings going up, and really getting back into economic well-being.
Inflation is coming down. That’s another positive aspect.
Another bright spot is China’s opening up and moving to faster growth. So this is really a strong side of the world economy. China's growth is going from 3 percent in 2022 to 5.2 percent, well above the global average in 2023. China plus India -- India is also growing very quickly -- that’s half of global growth in 2023.
YG: What's the possibility of a soft landing in Europe and in the US?
Leigh: The baseline is a painful landing, unfortunately. As central banks raise rates, we’re going to see unemployment going up and growth falling. To give you an example on unemployment in the US, we've got 3.5 percent unemployment now. We think that will go up to above 5 percent by 2024.
What could make that easier beyond food and energy prices, would be if the labor market was fueled by firms posting fewer openings and not firing people. That’s something that would make the heat in the labor market come down in a less painful way. That, unfortunately, is not our baseline right now, but it is an upside risk.
YG: We’re seeing huge layoffs in the US from Silicon Valley to Wall Street, and there’s still a labor market mismatch from way before the pandemic.
Leigh: The mismatch actually got a lot worse in the pandemic. It's just very, very hard for companies now to find workers to fill their openings. We've got for every unemployed person in the US 1.7 openings. That's one of the highest levels in the last 50 years. So it’s something that we’re seeing some improvement on in the latest prints -- that ratio of openings to available unemployed workers -- but we’ve still a way to go to cooling down inflation through that channel.
YG: If it’s a painful touchdown for a lot of advanced economies, are we going to see central banks getting ready for a policy u-turn toward the end of this year?
Leigh: No. Given that inflation is still really high, and even underlying inflation is way above target, we see the need to stay the course. In fact, we expect that central banks will raise rates some more, and even keep them at a high level in 2023. So until we see really clear evidence of underlying heat coming out of inflation around the world, that’s going to be the priority.
YG: We've been living in this high inflation environment for almost two years now. Is it the new normal?
Leigh: I certainly hope not. Because the longer this high inflation lasts, the more people are going to think this is normal and raise their expectations of long-term inflation. We saw that in the past, getting entrenched in the 1980s, and central banks then had to really hurt the economy even more to tame inflation. So central bank communication being very clear about their goals, and continuing to stay the course is important. Otherwise, they'll be even more pain later on.
YG: If the US, Europe and UK continue to raise interest rates, what could be the consequences for emerging markets?
Leigh: One of the worries is definitely debt distress, with these higher borrowing costs, because major central banks are raising rates. This is coming on top of lower growth. So higher rates and lower growth means debt, which has really increased significantly in a lot of emerging market during the pandemic, is a big burden now.
In fact, in low income countries about 60 percent of them are either already in a default or close to it.
Editor: Tom Litting