IMF signals upgrade to forecasts as optimism spreads at Davos

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Business leaders and top government officials have expressed optimism about the global economy as China drops Covid controls, the US embarks on a green investment boom and western Europe adjusts to the impact of Russia’s war in Ukraine.

At the World Economic Forum in Davos, Gita Gopinath, deputy managing director of the IMF, signalled that the fund would upgrade its economic forecasts. Instead of predicting a “tougher” 2023, she now expected an “improvement” in the second half of the year and into 2024.

Positive data from Europe and the US in recent weeks have boosted hopes that the world’s economy will avoid a recession this year. Germany’s chancellor Olaf Scholz said the eurozone’s largest economy would avoid a recession, while the Mannheim-based think-tank ZEW said its monthly gauge of investor sentiment had turned positive for the first time since Russia’s invasion of Ukraine. 

Daniel Pinto, head of JPMorgan’s investment bank, highlighted the global economy’s resilience. “We have come through a period with a war, a pandemic and the biggest normalisation of monetary policy in history,” he said. “Considering all the things that have happened, the world is a lot better than you would have expected.”

While the economic downturn in advanced economies no longer appears as bad as feared, Chinese growth has slowed, with Beijing posting a disappointing rate of 3 per cent for 2022.

Gopinath warned that 2023 would nevertheless be a “tough year”. With inflation still too high, central banks should “stay the course” with interest rates rising until inflation fell sustainably, she said.

However, financial markets have rallied on the back of lower energy prices, fewer supply chain difficulties and the end of China’s zero-Covid policy.

Liu He, Beijing’s top economic official, told the forum China’s economy would bounce back. “If we work hard enough, we are confident that growth will most likely return to its normal trend,” he said. “The Chinese economy will see a significant improvement in 2023.”

Alan Jope, Unilever chief executive, said China’s rapid reopening was unexpected. “We’re gearing up for revenge spending,” he said, referring to the phenomenon of consumer shopping sprees once restrictions are eased.

Gita Gopinath says that instead of a ‘tougher’ 2023, she now expects an ‘improvement’ in the second half of the year and into 2024 © Stefan Wermuth/Bloomberg

US business leaders hailed the Biden administration’s Inflation Reduction Act – a $369bn bid to stimulate green investments in America’s economy. Mark Hutchinson, chief executive of Fortescue Future Industries, said the tax incentives were “huge . . . you’d put every investment dollar you possibly could in there,” he said of the US.

Börje Ekholm, CEO of Swedish mobile phone maker Ericsson, voiced frustration at Europe’s regulation-led approach, which he said was stifling technology companies, calling instead for a more “pro-growth” attitude.

But European Commission boss Ursula von der Leyen told the forum that Brussels would temporarily water down state aid regulations and pump cash into strategic climate-friendly businesses, as it sought to counter Biden’s green subsidy package.

“There is a need to be competitive with offers and incentives that are currently available outside the EU,” she said.

She added that the region had brought energy prices down “quicker than anyone expected”.

European wholesale natural gas prices hit an intraday low of under €52 a megawatt hour on Tuesday, the lowest since September 2021. Although prices remain more than double the average price before Russia’s invasion of Ukraine, they have fallen 85 per cent since peaking in August.

Fatih Birol, head of the International Energy Agency, praised Europe’s progress, but cautioned gas prices would not have fallen as far had the weather not be so clement.

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