by Kari Grenade, PhD, Caribbean Economist and Macroeconomic Advisor
The International Monetary Fund (IMF) publishes its flagship World Economic Outlook (WEO) Report twice a year in April and October (with updates in January and July), in which it provides a comprehensive assessment of global economic performance, prospects and risks.
The salient message of the October 2023 WEO is that the global economy is showing resilience despite the series of unprecedented shocks it faced over the past 3 years, but the pace of global economic growth is slow, with several factors restraining a faster recovery. Moreover, risks are many and are on the downside, and as such, appropriate policies are needed to support the recovery and mitigate risks.
The IMF estimates that the pace of global economic growth will decelerate to 3% this year from 3.5% in 2022 and will slow down a bit further to 2.9% in 2024. The projected slowdown is more pronounced in Advanced Economies than in Emerging Market and Developing Economies. Average growth in Advanced Economies such as the USA, Canada, Japan, the UK, and the Euro Area is forecasted to decelerate from 2.6% in 2022 to 1.5% in 2023 and 1.4% in 2024. Meanwhile, average growth in Emerging Market and Developing Economies, which include China, India, Brazil, Mexico, South Africa and 151 other countries, is projected at 4.0% in both 2023 and 2024, a slight moderation relative to the average of 4.1% in 2022.
The IMF cites several factors that are restraining faster global growth, including rising geoeconomic fragmentation, tight monetary policies, lingering effects of the pandemic as well as the Russian-Ukraine war, and climatic shocks. Moreover, the medium-term projection for average global growth of 3.1% is the lowest average in 3 decades and is subject to several downside risks including among others, uncertainties about possible end-game scenarios relating to the current challenges being faced in China’s real estate sector and any potential spillovers to the wider global economy.
Regarding global inflation, the IMF forecasts that it will moderate from its peak of 8.7% in 2022 to 6.9% in 2023 and 5.8% in 2024; however, the forecasts are well above historic averages, signalling that the factors fuelling inflationary pressures remain, though easing somewhat.
The October 2023 WEO can be accessed here.
Why should Caribbean citizens care about global macroeconomic development? Caribbean citizens should care a lot about global macroeconomic developments because the economic performance of Caribbean economies is inextricably tied to that of the global economy. The average economic growth in the 14 independent members of Caricom (excluding Guyana) is projected to slow down from 3.6% in 2023 to 3.2% in 2024. With Guyana’s forecasted growth of 38.4% in 2023 and 26.6% in 2024, the regional average improves to 6.1% in 2023 and 4.9% in 2024. While Caribbean economies are recovering from the series of compounding shocks, the recovery is fragile at best and subject to setbacks because of the many downside risks cited in the IMF’s WEO. In that context, sectors such as tourism and travel, manufacturing, wholesale and retail trade, and real estate become particularly vulnerable to global developments and as such, risk mitigation strategies in those sectors must be devised and be ready for implementation as needed.
Other global developments occurring after the publication of the October WEO pose fresh risks to the global economy and by extension, Caribbean economies. One such development is the war between Israel and Palestine, which can affect international oil markets with potentially harsh consequences for oil-importing nations of the Caribbean. The average inflation for the 14 Caricom countries is forecasted at 10.9% in 2023 and 5.7% in 2024, removing Haiti and Suriname from the sample, which have particularly high double digits rates because of currency devaluations, the estimated average inflation rate for the Region moderates to 4.6% in 2023 and 3.0% in 2024.
The harsh reality is that Caribbean citizens will continue to face high prices. As I have explained in previous articles, there is little (if anything) Caribbean governments can do to directly reduce the price of imported goods. However, they can take targeted measures to cushion the impact of high import prices, especially on the most vulnerable in society. Revenue windfalls arising from taxes and duties on higher import values can be used to help in this regard. Increasing minimum wages across sectors can also help to the extent that the increases do not trigger a wage-price spiral. Businesses will have to manage inflation implications on profitability and households and individuals will have to manage the impact of high prices by prioritising spending.
Caribbean economies will also be affected by high global interest rates. The Federal Reserve or FED for short (the USA Central Bank) has increased its benchmark rate 11 times since March 2022 putting it at its current range of 5.2 and 5.5%. Other major central banks across the world have also raised interest rates. Indeed, global Interest rates are expected to remain elevated until inflation eases substantially. Vulnerabilities to high global interest rates by Caribbean governments and businesses must be carefully managed. Specifically, this applies to governments and businesses with a large portion of their debt portfolios in variable interest rates. Credit conditions, and by extension economic activity, can also be adversely affected if Caribbean central banks also raise their policy rates, which would translate to higher lending rates by financial institutions within countries.
Based on the near-term economic forecast, some tough months are ahead for Caribbean citizens in the context of a challenging global economic environment. As such, they would need to make prudent decisions regarding the management of their personal budgets in navigating the difficult economic terrain. Caribbean policymakers would have to show love and care for their citizens through appropriately calibrated policies to cushion the impact on citizens, especially on the most vulnerable.
