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IMF issues modest upgrades on global economic outlook, but worries over surging inflation

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The International Monetary Fund (IMF) issued modest upgrades to the economies of the United States and Europe, which have proved more resilient than expected even with much higher interest rates and the shock of Russia’s invasion of Ukraine.

The fund now expects the United States, the world’s biggest economy, to grow 1.6 percent this year, down from 2.1 percent in 2022 but up from the 1.4 percent expansion that the IMF had predicted in January. A robust U.S. job market has supported steady consumer spending despite higher borrowing rates for homes, cars, and other major purchases.

U.S. Treasury Secretary Janet Yellen shared a more optimistic view Tuesday on the state of the U.S. economy and the banking system, which she says “remains sound.”

“I wouldn’t overdo the negativism about the global economy,” she said. “I think countries have proven resilient, and a number of emerging-market and lower-income countries continue to show resilient growth.”

She pointed back to her statements during the Group of 20 meetings in February in India.

“I said that the global economy was in a better place than many predicted last fall,” Yellen said. “That basic picture remains largely unchanged. Still, we remain vigilant to the downside risks.”

For the 20 countries that share the euro currency, the IMF foresees lackluster growth of 0.8 percent. But that, too, marks a slight upgrade from its January forecast. Though Europe has suffered from the wartime cutoff of Russian natural gas, surprisingly warm weather has reduced demand for energy. And other countries, including the United States, were nimbler than expected in delivering natural gas to Europe to replace Russia’s.

China, the world’s second-biggest economy, is expected to grow 5.2 percent this year, unchanged from the IMF’s January forecast. China is rebounding from the end of a draconian zero-COVID policy that kept people home and hobbled economic activity.

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In the United Kingdom, where double-digit inflation is straining household budgets, the economy is expected to contract 0.3 percent this year. But even that is an upgrade from the 0.6 percent drop that the IMF had predicted in January for the U.K.

In the developing world, the IMF downgraded growth prospects for India, Latin America, the Middle East, sub-Saharan Africa, and the less-developed countries of Europe. Ukraine’s war-ravaged economy is forecast to shrink by 3 percent.

The world economy has endured shock after shock in the past three years. First, COVID-19 brought global commerce to a near standstill in 2020. Next came an unexpectedly strong recovery, fueled by vast government aid, especially in the United States.

The surprisingly powerful rebound, however, triggered a resurgence of inflation, which worsened after the Russian invasion of Ukraine drove up the prices of energy and grain.

The Fed and other central banks responded by aggressively raising rates. Inflation has been easing, though it remains well above the central banks’ targets. Inflation is especially intractable in the service industries, where worker shortages are putting upward pressure on wages and prices.

Higher rates have caused problems for the financial system, which had grown used to extraordinarily low-interest rates.

On March 10, Silicon Valley Bank failed after making a disastrous bet on falling rates and absorbing heavy losses in the bond market, news of which triggered a bank run. Two days later, regulators shut down New York-based Signature Bank. The failures were the second-and third-largest in U.S. history. In the wake of the troubles, U.S. banks are expected to cut back on lending, which could hurt economic growth.

A finance professor at Stanford University, Darrell Duffie suggested that the “weakness in banks caused by Silicon Valley has already done some of the Fed’s work in controlling inflation.”

“Regulators need to pay much closer attention to the safety and soundness of banks and change their policies and supervision,” Duffie said.

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