Transcript

World Economic Outlook Update

January 31, 2023

Moderator:

JOSE LUIS DE HARO

Communications Department

Panelists:

PIERRE-OLIVIER GOURINCHAS

Chief Economist and Director, Research Department

DANIEL LEIGH

Division Chief, Research Department

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P R O C E E D I N G S

(9:30 a.m.)

MR. DE HARO: Okay, I think we can start. I want to thank you, everyone, for being here. Good morning for those who are joining us here in Singapore, and across Asia. Good evening for those who are joining us in the other side of the world, especially the western hemisphere. I am Jose Luis de Haro, with the Communications Department at the IMF, and we are here to introduce the World Economic Outlook Update. Here with us is Pierre Olivier Gourinchas, he is the Chief Economist, and the Director of the Research Department. Also joining us today is Daniel Leigh. He is the Division Chief at the Research Department.

As I said, we are introducing the World Economic Outlook Update. It gives us an assessment on the global economy, the risks, and also it will include some policy recommendations. I hope that by this time, all of you have had access to the document. Not only to the World Economic Outlook Update itself, but also to a blog authored by Pierre Olivier. If you have not had access, I would recommend you to go to IMF.org, and then Pierre Olivier is going to start with some opening remarks, and then we will be proceeding to your questions. I want to remind everyone that we will also be taking questions from reporters that are joining us online. So, without further ado, Pierre Olivier, the floor is yours.

MR. OLIVIER: Thank you, Jose, and good morning to everyone here. Good evening, if you are in the western hemisphere. Good night, if you are in Europe. The global economy is expected to slow this year before rebounding next year. Growth will remain weak by historical standards, as the fight against inflation, and Russia’s war in Ukraine, weigh on activity. Despite these headwinds, the outlook is less gloomy than in our October forecast, and could represent a turning point with growth bottoming out, and inflation declining.

Economic growth proved surprisingly resilient in the third quarter of last year, with strong labor market, robust private demand, and better-than-expected adaptation to the energy crisis in Europe. Inflation, too, showed improvement, with overall measures decreasing in most places, even if core inflation, which excludes more volatile energy and food prices has yet to peak in many countries. China’s sudden reopening paves the way for rapid rebound in activity. And global financial conditions have improved as inflation pressures started to abate. This, and a weakening of the US dollar from its November high, provided some relief from emerging and developing economies.

Accordingly, we have slightly increased our 2022 and 2023 growth forecasts. Global growth is expected to slow from 3.4 percent in 2022, to 2.9 percent in 2023, then rebound to 3.1 percent in 2024. For advanced economies, the slowdown will be more pronounced, with a decline from 2.7 percent last year, to 1.2 percent this year. Nine out of ten advanced economies will see growth decelerate this year. US growth will slow to 1.4 percent in 2023, as federal interest rate heights work their way through the economy.

Euro-area conditions are more challenging. Despite signs of resilience to the energy crisis, a mild winter, and generous fiscal support, with tightening monetary policy, and negative terms of trade shock, due to the increase in the price of supported energy, we expect growth to bottom out at 0.7 percent this year in the region. Emerging market and developing economies have already bottomed out as a group, with growth expected to rise modestly to 4 percent, and 4.2 percent, this year and next.

With China’s economy now reopening, we project growth rebounding to 5.2 percent in 2023. Together, China and India will account for half of global growth this year, while the United States, and the Euro-area combined will account for 10 percent only. Global inflation is expected to decline this year, but even by 2024, headline and core inflation will still be above pre-pandemic levels in more than 80 percent of countries. Core inflation has been revised upwards again to 6.9 percent in the fourth quarter of 2022, and is expected to decline to 4.4 percent by the end of this year.

Adverse risks to the outlook have moderated since October, and some positive factors have gained in relevance. But overall, the risks remain tilted to the downside. China’s recovery could stall, caused by greater-than-expected economic disruptions caused by COVID infections, or by a sharper-than-expected slowdown in the property sector. Inflation could remain stubbornly high, with continued labor market tightness and growing wage pressures requiring tighter monetary policies. An escalation of the war in Ukraine remains a major threat, and could destabilize energy and food markets, and further fragment the global economy. A sudden reprising in financial markets could tighten financial conditions, especially in emerging market and developing economies.

On the upside, strong household balance sheets and solid wage growth could help sustain private demand, although these may potentially complicate the fight against inflation. Easing supply chain bottlenecks and labor market cooling due to falling vacancies could allow for a softer landing, requiring less monetary tightening. The recent news about inflation is encouraging, but the battle is far from won. Monetary policy has started to bite, with a slowdown in new home construction in many countries. Yet, inflation-adjusted interest rates remain low, or even negative in the Euro-area and other economies. And there are significant uncertainty about both the speed and effectiveness of monetary tightening.

Where inflation pressures remain elevated, central banks need to raise real policy rates above a neutral stance, and keep them there, until underlying inflation is on the decisive, declining path. Easing too early risks undoing most of the gains achieved so far. The financial environment remains fragile, especially as central banks embark on an uncharted path towards shrinking their balance sheets. It will be important to monitor the buildup of risks, and address vulnerabilities, especially in the housing sector, or in the less-regulated non-bank financial sector.

Emerging market economies should let their

currencies adjust as much as possible, in response to the tighter global monetary conditions using FX interventions or capital flow management where appropriate to smooth excessive and non-fundamental volatility. Many countries responded to the cost-of-living crisis by supporting people and business with broad and untargeted policies that helped cushion the shock. Many of these measures, however, proved costly and increasingly unsustainable. Countries should instead adopt targeted measures that conserve fiscal space, allow high energy prices to reduce demand for energy, and avoid overly stimulating the economy.

Supply side policies also have a role to play. They can help remove key growth constraints, improve resilience, ease price pressures, and foster the green transition. These would also help alleviate accumulated output losses since the beginning of the pandemic, especially for emerging and low-income economies.

Finally, the forces of geo-economic fragmentation are growing. We must buttress multilateral cooperation, especially on fundamental areas of common interest, such as international trade, expanding the financial global safety net, public health preparedness, and the climate transition. This time around, the global economic outlook hasn’t worsened. That’s good news, but not enough. The road back to a full recovery with sustainable growth, stable prices, and progress for all has only started. Thank you.

MR. DE HARO: Thank you, Pierre Olivier for those remarks. And before we open the floor to your questions, I’m going to set some ground rules. If you want to formulate a question, please raise your hand. Wait until I call on you. When I do, just identify yourself, and the media you represent, and as I said before, we are also going to be taking questions of reporters that are joining us live on WebEx, and also taking questions from the press center. So, we will start here in the room. Wall Street Journal. Go ahead.

QUESTIONER: Thank you. I am Jason Douglas for the Wall Street Journal. Can I ask two questions? I promise they are related.

MR. DE HARO: Go ahead.

QUESTIONER: So, the first question is: How resilient is the Chinese consumer? Because that appears to be pretty important to the strength of the global recovery. And the second is related, which is: Normally when China’s economy is driving a global recovery, it’s been stimulus-led, investment-led, and that kind of thing in the past. I’m thinking particularly after the financial crisis. This time, it seems a bit different, right, with a consumption-led recovery in China. I am just curious if you have any thoughts on how that might have different effects on the global economy, either in terms of its strengths, or in terms of the patterns of demand, and that kind of thing. Thank you.

MR. GOURINCHAS: Thank you. Well, thank you for your question. So, on this is a question about the Chinese economy. And we have, as I mentioned effectively, we are projecting a fairly strong rebound inactivity in this year. We're projecting 5.2 percent. This is 0.8 percentage point above our October forecast are very significant. All the indications are that we are witnessing a rapid reopening of the economy. And so here, when we think about the reopening of the Chinese economy, it's going to have an impact on the supply side because we can anticipate that once the economy fully reopens, we have less supply chain disruptions that we have witnessed in 2022 when there were lockdowns and confinements. So, we're going to get an expansion in production coming from that side. And also, we're going to get an increase in domestic demand as Chinese households are going to be able to resume activities and start spending. We're going to see that in number of dimensions, including, for instance, tourism. That's going to be an engine that will benefit other countries as well.

Some estimates that we have computed in at the Fund suggest that for every percentage point higher growth in China, there is a spillover effect to the rest of the world that is about 0.3 percentage points. So, quite significant, and of course, is stronger for countries that are closer trade partners of China.

MR. DE HARO: Thank you, Pierre Olivier. Anybody else in the room? I'm going to go with Nikkei. Wait, wait, the microphone. It's coming.

QUESTIONER: You just mentioned about the spillover effects of Chinese recovery. So, I will ask about the spillover effects on Southeast Asian economies. Southeast Asian countries are geographically across to China and have crossed trade relations with China. Why has China's growth being revised upwards since last October while our growth of Southeast Asia has been revised downwards this time?

MR. GOURINCHAS: Well, even if China's growth has been revised upwards, globally, what we have is a decline in the growth rate from 3.4 percent to 2.9 percent. And for many Asian economies that are very open to international trade, that slowdown in global activity is going to be the dominant factor, and that's going to lead to downward revision in economic activity. But let me turn it over to my colleague Daniel Leigh here to provide some additional remarks.

MR. LEIGH: Thank you. I would add that another factor that is weighing down in the region is the fight against inflation here as well. We've seen since we published our last forecast in October, central banks raising interest rates, and we expect that will successfully bring inflation down. But in the short-term, it, it does mean that demand is being called and that explains part of the revision.

MR. DE HARO: Thank you, Daniel. I'm going to go to the Press Center and we have a question from Anthony Herbert who goes as follows. Inflation rates may possibly have peaked now, but only after price levels and interest rates have rising sharply in absolute terms. The lack impact of monetary tightening does, has yet to show through. What impact will this have on households and on the corporate sector?

MR. GOURINCHAS: Well, so we are in the middle of this tightening phase. Actually, some countries are already near the peak, others are more towards the middle. So, there's been this very significant synchronized tightening. Most central banks around the world have been raising their policy rates. And it is correct that it takes time for tightening of monetary policy to work its way and affect domestic activity and demand, and then eventually inflation. But I would make two remarks. So, first, we're already seeing signs that in what we call the interest sensitive sectors, we're already seeing signs of the tightening having some effects. Mortgage rates have been going up. Sectors are more reliant on borrowing, for instance, we're also seeing some construction. We see some construction in credit. Second, when all central banks together are tightening policy rates that they're doing now, it is cooling off global demand. This is an effect also on commodity prices. We have seen energy and commodity prices coming down in the second part of this year, and part of this is due to this tightening of monetary policy. So, the full effect is not there, and we anticipate the full effect will be felt towards the end of this year and into 2024. It's going to take some time, but at the same time, we are starting from a situation where inflation rates remain well above central bank targets, and therefore, there is a need to remain in the contractionary stance until inflation sort of shows that decisive path towards central bank targets.

MR. DE HARO: Thank you, Pierre Olivier. We're going to go back to the room. Any questions? We're going to go with AFP.

QUESTIONER: So, the IMF will be sending a review team to Islamabad today. How confident or optimistic are you about the bailout program negotiations being revived? And do you have a timeframe for it as well? Thank you.

MR. GOURINCHAS: Thank you. So, yes, we have an in-person mission who is going to be in Pakistan. And the focus of the mission will be to restore domestic and external sustainability, help the country restore domestic and external sustainability. And I will turn it over to Daniel for more details.

MR. LEIGH: Thank you. Pakistan's economy is coming out of a very strong 2022 with 6 percent growth, well above the world average. But in 2023, there is going to be a slowdown, and that's partly the end of the stimulus that was there from fiscal policy in 2022. That's going away. And also because of the high inflation, the central bank has increased interest rates, which we see as an appropriate step, 17 percent recently, the interest rates. That's going to cool domestic demand. And so we see growth of 2 percent in 2023. Unfortunately, we also had to downgrade the growth of forecast for Pakistan by one and a half percentage points for 2023. And that's because of the floods, which was a terrible supply shock, both reducing activity, but also raising inflation and putting various pressures on the country. Inflation, therefore, went up because of this. We see inflation reaching about 21 percent in 2023. This is also because of the exchange rate depreciation. And though we do see inflation, thanks to the measures that the authorities are taking, coming down and converging to the five to 7 percent target range by mid-2025. That's the outlook for Pakistan.

MR. DE HARO: Thank you, Daniel. The reporter there.

QUESTIONER: Good morning, sir. I'm from the China Central Television. Thank you very much for giving me this chance and my question is that just now, according to the report, Chinese economy is projected to increase to growth 5.2 percent in 2023. It is higher than the previous forecast. And just now, you also explained some of the reasons. So, in your opinion, what is the key reasons? What is the most important driving forces of the Chinese economic growth? Thank you.

MR. DE HARO: Pierre-Olivier, before we answer this question, we have another question on China, and we can group them. There's one from Yicai that goes as follows, could you elaborate more on China's reopening and its impact on the global economic activities and inflation? And also, I see Gabriel on our WebEx. Gabriel, can you come in and formulate your question?

QUESTIONER: Yes. Hi. Hello. Thanks for the opportunity. My question is very much like all the other questions on China. Especially, I wanted know because the IMF has upgraded China's growth forecast pretty significantly. And I want to know specifically, what were the reasons throughout the past few months that has led to this increase and especially, its implications towards the regional and global economy? Thanks.

MR. GOURINCHAS: Well, so I coming back to China, so very clearly, the development since our last run of forecast in October has been the reopening of the economy and the end of the zero covid measures that were in place up until that time. Now, these measures have served China very well in terms of protecting its population through the very difficult times of the pandemic, but it was becoming increasingly difficult to sustain them. And there was a very rapid pivot towards the end of last year towards reopening the economy. That leads currently to a situation that is a bit in a state of flux in the first few months after the opening. But what we are seeing after that is a stabilization of the economy fully reopened and fully able to produce and consume, et cetera. And so that's a major factor behind our upward revision for China in 2022. I want to mention that there are other forces at play when we look at the Chinese economy. For instance, the property sector is still showing signs of weakness. This is something that has been weighing down on the economic activity in China. The property sector is a very important sector, was one of the important component of growth in past years. And going forward, this is something that is not going to be as much of an engine of growth until there's been some cleaning up in that sector. And that's why when you look at the numbers, even though we are projecting a very strong rebound in 2022, our numbers for 2023, sorry, our numbers for 2024 is about 4.5 percent, because we are seeing some signs that the Chinese economy may not be growing at the same rate in coming years after this rebound. Now, there was also part of the question I think from the WebEx was on inflation. And here there are two forces. On the one hand, China's reopening is a boost to growth in China and globally, as I explained earlier through the demand that Chinese households may have of foreign goods or foreign services and tourism. But it can also put upward pressure on commodity prices and that would reverberate in the current environment. On balance, our assessment is that the net of these two will be that this will be a factor that is conducive to more growth, and it will not lead necessarily to an acceleration of inflation coming from commodity prices. In fact, commodity prices, energy prices are projected to decline in 2023 in our forecast.

MR. DE HARO: Thank you, Pierre Olivier. We have a couple of questions that came from the Press Center on Africa. I’m going to try to group them. One of them says, “What is the outlook for Sub-Saharan Africa and the main challenges for the upcoming months?” This comes from Lusa News Agency.

And there’s another one on Ghana. “What is Ghana’s economic outlook for 2023? And drivers will that spur economic growth in Ghana considering the current economic crisis the country finds itself in?” This comes from Ghana News Agency.

MR. GOURINCHAS: Well, thank you. On Sub-Saharan Africa, what I can say is that we have a difficult year for the region that is very much affected by the external forces that are shaping the global outlook, whether it’s the Russian war in Ukraine and energy crisis or the fight against inflation and the tightening of global financial conditions that comes with that.

So, but growth is projected to be around 3.8 percent in Sub-Saharan Africa. And this is quite a bit below the typical growth rates that the region experienced before the pandemic.

And in addition, in the region, there is an issue of food insecurity. Even though food prices have come back -- the food price index has come back to pre-war level, so levels we had about a year ago or a little bit more than that -- they’re still elevated compared to pre-pandemic times. And there are in many countries a large portion of the population may be subject to food insecurity.

Let me turn over to Daniel on Ghana and Sub-Saharan Africa.

MR. LEIGH: Okay. Thank you. On Ghana, we do expect growth to slow this year. This is partly because of the global headwinds that Pierre Olivier has been discussing. So, it’s a difficult time for the global economy that affects Ghana.

But also, there are some domestic headwinds. In particular, inflation has increased significantly. And so, the Central Bank is tightening monetary policy, but that is cooling the economy domestically. Plus, the fiscal policies are tightening to address the elevated debt. This is the cooling in 2023.

But in 2024, we see a rebound in particular in the extractive activities. And that is going to support Ghana in 2024.

I would add that right now -- so just very recently -- the IMF team went to Ghana, reached agreement with the Ghanian authorities on an economic reform program that will be supported under a $3 billion extended credit facility. And the goal of that program is to reestablish macroeconomic stability, debt sustainability, and create the foundations for higher and inclusive growth over the medium-term.

MR. DE HARO: Thank you, Daniel. I just want to remind everybody that join us in Webex to turn on their cameras. We’re going to go to you shortly. But first of all, first I want to go in the room again. The reporter in the second row, please.

QUESTIONER: Hello. Mercedes from the Financial Times. How are you? I just wanted to ask about the potential for a number of debt defaults across emerging markets. I know the IMF had some concerns about this previously. Are you now more optimistic?

MR. GOURINCHAS: Well, we have been flagging that a number of countries, especially among low-income countries and some emerging market economies, are either in situations where they are getting close to debt distress or they are in debt distress right now. And the factors behind this are really the legacy of the pandemic and the energy crisis that has eroded fiscal buffers in many countries, has reduced growth rates, led to inflation, the desire to provide support to people and businesses, and has led some countries to have exhausted some of their fiscal space.

So, the numbers about 60 percent of low-income countries that are either at risk of debt distress or already in debt distress. And we have a few emerging market economies. Now, that’s a large number of countries. At the same time, this is not something that we see as a systemic debt crisis environment. These are a large number of smaller economies. And we, you know, work at the Fund in a different number of fora, like through the Common Framework, for instance, and other areas with the Paris Club, et cetera. We are trying to help countries that are finding themselves in situation of debt distress to be able to restructure their debts, maybe obtain financial assistance, and then achieve some amount of macroeconomic stability and debt sustainability going forward.

MR. DE HARO: Thank you, Pierre Olivier. I see Paula Lugones from Clarin on Webex. Paula, go ahead.

QUESTIONER: Thank you, Jose Luis. How do you think this new global outlook would impact on Argentina, which has a very high inflation and a significant debt with the IMF? Thank you.

MR. DE HARO: Thank you, Paola. And now that we are in the region -- not in Argentina -- but let’s go to a question from Yolanda Morales from El Economista about Mexico. “What factors will allow Mexico to withstand the weakening of economic activity in the United States, especially the US situation will affect remittances and manufacturing demand?”

MR. GOURINCHAS: Well, let me start with Argentina. So, Argentina, we had an upward revision to output in the past year, about 0.5 percentage point to 4.6 percent for the year. And that’s on the back of a stronger than expected manufacturing and retail activity in the economy.

Now, of course, we are expecting that there will be a slowdown in the coming year. So, growth in 2023 is projected at two percent. This is actually not revised from our October forecast, so this is more or less in line with what we had been expecting. And this is a combination of both the external forces that we’ve already mentioned -- the slowdown in the global economy that is going to weigh down on Argentina as well -- and the tightening policies that are put in place in the country, both tightening monetary policy but also some adjustment on the fiscal side to try to get a handle on the very elevated inflation rate the country has experienced. In 2022, last year, we have an inflation rate that is close to 100 percent in the country.

So, in Argentina, we expect some slowdown. We believe that what’s really important is for the policy targets that have been put in place in the context of the program that the country has with the IMF to be met, both on the fiscal and the monetary side, that will help anchor inflation going forward and help stabilize the economy.

On Mexico, Mexico in a sense is very sensitive to the external forces going on. And since we had the revision in the US, that also means more activity in the US in 2022. And that translates into also stronger activity in Mexico. So, we have a pretty strong revision in 2022 to 3.1 percent. That’s a 0.9 percentage point revision. And it carries over into next year as well. We have 1.7 percent expected in 2023. That’s a 0.5 percentage point above than our last forecast. So, this is largely the influence of external forces.

Remittances are important but they are not a huge driver of total economic activity in Mexico. They represent about four percent. So, this is not one of the major driving forces.

Going forward, Mexico is implementing a tight monetary policy. They’re actually probably near the end of their tightening cycle. They’ve tightened quite aggressively monetary policy to bring inflation down, which was at eight percent last year and is expected to come down a bit this year. And fiscal policy is broadly neutral. So here, the overall adjustment of macroeconomic policy seems about right. And I think for Mexico, the focus should be perhaps on some structural reforms that would help the economy grow a little bit faster going forward.

MR. DE HARO: Thank you, Pierre Olivier. We’re going to go for the room and then we will go to Webex because I see ITV News. We will go later to you but let’s take a question from the room. Somebody can pass the microphone to -- thank you very much. No, actually can we go first with her and then we will go back to you. Sorry.

QUESTIONER: Thank you. Michelle Jamrisko from Bloomberg. I wanted to ask a follow-up on the debt distress issues and specifically to Sri Lanka and Pakistan. I was wondering if anything has changed in your thinking given these updated forecasts around where those situations lie and how the talks will go going forward in the coming months?

MR. GOURINCHAS: Right. I mean I think we’ve already discussed Pakistan. I mean I can go back to Daniel. I’m not sure we have much more to add.

But on Sri Lanka, what I can say is we can confirm that India has indicated to the IMF that it is committed to deliver financing and debt relief consistent with helping the country restore its debt sustainability, which is a very good development. India is one of the non Paris Club official creditor. And Sri Lanka is engaged in other discussions with other official bilateral creditors to obtain similar assurances. Once they are secured, these will unlock access to IMF financing and will help the country move forward. So, that’s the development that we have at this point on Sri Lanka and we very much look forward for other official bilateral creditors to do their part.

MR. DE HARO: Thank you, Pierre Olivier. We’re going to go to Webex. ITV, go ahead.

QUESTIONER: My question -- well it’s sort of two questions really but they’re basically the same. Why do you expect the UK economy to perform worse than everyone else? And is Brexit one of the reasons you expect the UK economy to perform worse than everyone else?

MR. GOURINCHAS: Yeah. So, UK economy actually so let me start with the good news. The UK economy’s actually done relatively well in last year. We have revised upwards economic growth in the UK to 4.1 percent. That’s a 0.5 percentage point revision. And it’s one of the highest growth rates in Europe in that region for that year.

It is true that we are expecting a fairly sharp slowdown in this year. We’re projecting a growth that is -0.6 percent for the year. And that’s a downward revision of 0.9 percentage point. And there are basically three things that are behind this downward revision, and especially the fact that the UK is expected to do somewhat worse than some other countries in the region.

First, there is the exposure to natural gas. And we’ve had a very sharp increase in natural gas prices, energy prices in the UK. And there is a larger share of energy that is coming from natural gas with a higher passthrough to final consumers. And so, that has affected -- there’s been a stronger cost of living crisis, if you want, in the UK.

The second is that the UK also its employment levels have not recovered to pre-pandemic levels. So, this is a situation where you have a very, very tight labor market but you have an economy that has not reabsorbed back into employment as many people as it had before. And of course that means there is less output, less production.

And the third is that there is a sharp monetary tightening because inflation has been very elevated. That’s a side effect of this high passthrough of energy prices. Inflation was 9.1 percent last year. And it’s expected to actually remain quite high in this coming year at 8.2 percent. The Bank of England has started tightening. The UK has a fairly high share of adjustable rate mortgages. So, when The Bank of England starts increasing rates, it feeds into the mortgage rates that mortgage holders are paying. And that is also weighing down on activity.

So, all these three factors together explain why we have a somewhat sharper adjustment in 2023, but on the back of a relatively stronger growth in 2022.

MR. DE HARO: Thank you, Pierre Olivier. We have two questions. We’re going to go to the reporter here.

QUESTIONER: Hello, thank you very much for the sharing. So, I'm Lin from Channel News Asia, and I think we've discussed a lot about the global region, but we've not discussed much about where we are today, which is Singapore. So, our growth rate is actually still far from pre-pandemic growth, and in fact the manufacturing sector sunk for the first time in 2020, and even our construction sector, which is quite a key drive our of economy, is still very much lower than pre-pandemic levels. Do you have any opinions on how the reopening of China could affect our Singapore economy?

MR. GOURINCHAS: Well, so, yes, we have not talked about Singapore yet, so let's do this. So, we are projecting that growth last year was around 3.7 percent for Singapore, and that's actually also a sharp upward revision compared to October forecasts, which was only around 3 percent. So, 0.7 percentage point upward revision. But then, in 2023, in this year, we're projecting growth to slow down, very much in line with this pattern we see globally, so growth slowing down and then expected to rebound in 2024, 1.5 percent in 2023, and that's a 0.8 percentage point downward revision.

Now here, I think what is really important for Singapore, and it's also true for many other Asian economies is something I've mentioned already, which is the openness to trade. So, this is an economy that's going to be very influenced by what's happening in terms of global activity. And so, in terms of global activity, you are right that China's reopening suddenly a favorable factor that's going to lead to more activity, but this is in a context in which the global economy itself is slowing down from 3.4 to 2.9, and at the end of the day this is what dominates.

Now, we also have in Singapore a tightening of monetary policy, because inflation pressures have been building up, and inflation pressures are actually going to also continue into the current year, in part due to the one-off impact of the GST, the tax that is going to be -- has been imposed, and so, that's going to keep prices elevated for a little while longer until it works its way through the price level. And so, we're going to have some inflation pressures here, and monetary policy and financial conditions are going to remain relatively tight.

Singapore is also facing a very tight labor market. We know that this is sort of -- this was the case in the last few years, but it's still the case now, very, very tight labor market going forward, and that's also weighing down a little bit on activity. One point I want to mention is there is -- in the context of Singapore that's also the case for many other economies, a number of businesses are rethinking where they might decide to locate their activities, in the context of what we call fragmentation risks, and that could be actually a benefit to Singapore, place like Singapore going forward, as it could be an attractive place for foreign investors, and the location of activity compared to some other destinations.

MR. DE HARO: Thank you, Pierre Olivier. We're going to continue here in the room.

QUESTIONER: Hi. It's Emma from The Financial review, thanks for your time. You mentioned just in passing trade barriers, recently we've seen the U.S., London, and Japan a greater imposed sanctions on China's chip-making industry, comes after (inaudible) by Washington last year, where might we see the impact of these measures?

MR. GOURINCHAS: Well, we've seen a number of measures have been taken by different countries in terms of trying to restrict trade, including trade in semiconductors. Now, some of it is to try to increase the resilience of the economies, and that's something that is a concern for us, because we think that there is a danger that the global economy might try, we hear words like reshoring, or -- which is, you know, in other words of saying, you know, where you want to bring back the industry's home, or friend-shoring, and our analysis suggests that such reshoring or friend-shoring would be something that potentially could be harmful to the global economy.

Because at the end of the day, what matters for the global economy is resilience. And resilience means that you need to have diversified supplies or potential supplies, it's having concentrated suppliers, whether they're at home or whether they're abroad, and if they're at home they tend to be concentrated by construction, is something that puts countries in a vulnerable position if the shock happens. And so, the work we've done at the Fund suggests that diversification of supply chains is much more important in trying to improve resilience, improve growth, improve standards of living, rather than moving towards reshoring or friend-shoring.

And so, we are looking at these developments, like the ones you mentioned in the semi-conductor sector, and we're trying to understand their implications for the global economy, and, as I said, we are -- initial analysis suggests that this could take us on the path that is not necessarily one that leads to stronger growth.

MR. DE HARO: Thank you, Pierre Olivier. We're running out of time, we have a couple of questions left. I'm going to take one from the Press Center that comes from the Philippines, Business World, and it goes as follows, growth in ASEAN-5 countries is projected to slow to 4.3 percent in 2023, and then pick up to 4.7 percent in 2024, this is a slightly lower than your forecast in October, but what are the factors you consider in ASEAN-5 that led you to downgrade your original projections, and were there changes in each ASEAN country?

MR. GOURINCHAS: Daniel, would you like to give it a shot?

MR. LEIGH: Sure. Yes, in ASEAN, there is -- we're coming out of a very strong 2022, for the ASEAN-5 economies, 5.2 percent growth. Then in 2023, there is a slowdown as in many other parts of the world, 4.3 percent, before bottoming out and coming up in 2024 back to 4.7. There is in 2023 a moderation of that very strong growth we had in 2022 from the post-COVID reopening, that's fading out a little but, and plus we've got the slowdown in other parts of the world, the U.S., the EU, trades very closely with ASEAN. Because of the increase in inflation in the region, central banks have stepped up and raised interest rates, that is cooling at the moment, and as I mentioned there's a downgrade for 2023, partly because of that tightening and monetary policy.

2024, the recovery on the horizon is coming from the stronger growth in the world, including China. There's a very strongly-integrated region, about 50 percent of all of the trade in the region is with China, within the region, and 25 percent of the country's exports on average are going to China. About 20 percentage points of that is absorbed in China, and 5 percent re-exported. So, as you can see, there's a lot of benefit going to come from that speeding up in the Chinese economy. Inflation is also coming under control thanks to that tightening, back towards medium-term stability in 2024, 2025.

MR. DE HARO: Thank you, Daniel. We're running out of time, is there any question from the reporters in the room? Then I'm going to end with Yicai. Go ahead.

QUESTIONER: Thank you. I had a question on the U.S. economy and inflation. So, a softer landing, softish landing, or a hard landing, what is your base scenario? And in fact, U.S. Treasury Secretary Janet Yellen had just decided that persistently, low inflation, likely to return as a long-term challenge for the U.S. So, could you help us to more understand this current situation of inflation in the U.S.? Thank you.

MR. GOURINCHAS: Yes, I'll be happy to answer that. So, in terms of -- there's a lot of discussion as you can imagine about soft versus hard landing, whether -- or to rephrase this, will the U.S. economy have to go through a recession, and how deep would that recession have to be in order to bring inflation down? Our own projections is that there is a narrow path that allows the U.S. economy to escape recession altogether, or if it has a recession that recession would be relatively shallow. We are projecting, for instance, in our latest analysis, we're projecting unemployment rates to increase in the U.S., they are currently at 3.5 percent, but they would be expected to increase to around 5.2 percent by 2024. So, we are projecting that there will be a slowdown in inflation, it will be coming back to central bank targets. But this will be in the context of an increase in unemployment from 3.5 to 5.2. Now, 5.2 is still a very low unemployment rate by historical standards. So, going from 3.5 to 5.2 would not be a severe recession in the U.S. by far. So, that's what we're seeing in our baseline. There are risks around this baseline, there is a -- as I discussed in my opening remarks, there could be a need to tighten monetary policy more if inflation is more persistent, maybe labor markets will remain tight, and that will be required. Financial conditions could adjust in a negative way, and that could push the U.S. economy into a steeper slowdown. But this is not our baseline.

Now, let me come to the second part of your question on what we expect to see once we're past that inflation stabilization. And that's a discussion that is a very important discussion about where we expect real interest rates to settle. Right now, of course, they're rising. Right now, the -- the federal reserve is raising interest rates in order to cool down the economy and try to keep it on this gliding path towards lower inflation without precipitating a recession. But once this is over, you could anticipate that somehow then there won't be a need to keep tight monetary policy, and then the question would raise, what is the new normal we're going to be in? And there's a lot of discussion around that.

Some people think, and I think at the Fund, on average, the discussion is still taking place, but we are of the view that this might be a reasonable take, that the conditions that we had before the pandemic, the conditions that we had before the war and the energy crisis, which were conditions where real rates were low, and sometimes central bank were not able to, you know, keep the economy stimulated, because they couldn't push down interest rates enough, are likely to reoccur again. Other people are saying that no, we're in a new environment in which inflation is going to be higher, more persistently, there would be a need to have higher real interest rates more persistently. There's a lot of uncertainty about that. Our own assessment is sort of probably more on the first path than the second path, so, perhaps more in line with what Secretary Yellen outlined in her remarks.

MR. DE HARO: Thank you, Pierre Olivier. I said that it was going to be the last question, but Anthony Rowley from South Morning China Post has been patiently waiting on Webex, so I want to give him the last question of the press conference. Anthony, if you can hear us?

QUESTIONER: Just wonder whether it’s not premature optimism in the IMF and also on the (inaudible) Service. I mean ‑‑ the focus is very much on inflation rates, more than on absolute price levels. Price levels of all kinds of goods and services are a lot higher now, and going to go higher, than they were before the pandemic, for instance. So that’s going to impact consumption, and consumption is a very large component of GDP in many economies, so are your forecasts not perhaps a little prematurely optimistic?

MR. GOURINCHAS: Well, we certainly hope it is not, but let me address the point you’re raising. It’s a very good point, of course. Inflation moderating doesn’t mean that the price level is coming down, doesn’t mean that the fixed ‑‑ things that have become more expensive are becoming cheaper again. It’s just that it stabilizes at this higher price, so that’s the essence of the cost-of-living crisis that households around the world have been facing, whether we’re looking at energy or more broadly -- because now inflation is also in coal measures.

Now, there are two reasons why we think the economy is sort of adjusting to that. The first one is that for a number of countries -- this is especially true for the U.S., but it’s not just for the U.S., but in advanced economies, households are coming into this inflation energy cost of living crisis with relatively health buffers, so what in the U.S., for instance, there is a significant amount of excess savings that people have accumulated thanks to the fiscal support and checks and by the Administration during the pandemic and afterwards. In European economies, a lot of fiscal support on the energy front that has shielded households from facing the full increase in the price of energy, and other countries have also had measures on the food side. This has protected household’s balance sheet, and it means that they have a buffer with which they can absorb some of these increasing prices. That’s the first layer.

The second layer is, of course, what we are seeing also is very robust increase in nominal wages, so nominal wages have been increasing as a result of -- in part as a result of the increase in prices, so the worry there is that if the increase in wages triggers a second round of increasing prices, and then we get into what is called a wage-price spiral, our own analysis, which we developed in one of the chapters in the World Economic Outlook in October, is that this doesn’t seem historically to be happening too often, especially when monetary policy remains well anchored, when inflation expectations remain well anchored. You could have a catch-up in nominal wages that offset the loss of real income, if you want, and if it doesn’t trigger ongoing inflation, then that’s another way in which households are going to recover some of the ground. So these two things together lead us to some very, very moderate optimism. I don’t want to exaggerate the optimism. It’s still going to be a challenging year.

MR. DE HARO: Thank you, Pierre-Olivier. Thank you, Daniel, and on behalf of Pierre-Olivier, Daniel, and the Research Department of the IMF, I want to thank you all for attending this press briefing. I want also to remind you that we will be launching a full edition of the World Economic Outlook in the Spring, and I hope that I hear back from all of you by then, and if you have any additional questions, please feel free to send it to me to media@IMF.org, and have a good rest of your day. Thank you.