World Economic Outlook

One chaotic, disappointing year is ending. Another one is likely in store. In October, the IMF released its annual economic outlook projecting weak growth across the world in 2023. It placed particular emphasis on three issues: high inflation and central bank tightening, Russia’s invasion of Ukraine, and the continued effects of Covid—especially in China.

HBR asked three experts about what to expect for the economy in 2023, and how things have evolved since October.

Mihir Desai is a professor of finance at Harvard Business School. Karen Dynan is a professor at Harvard and a senior fellow at the Peterson Institute for International Economics. And Matt Klein is an economic journalist and the author of The Overshoot newsletter. We put the same questions to all three; their replies, edited for length and clarity, are below.
Let’s start with inflation and interest rates: Where do things stand as the year comes to a close?

Mihir Desai: We’ve lived through a seismic change in rates that we’re still digesting. Those belated increases, along with improving supply-chain considerations, have done well in improving the inflation outlook. But the effects of those interest-rate increases are still being felt in terms of consumer behavior, firm investment plans, and asset prices.

While the runaway aspects of inflation have ameliorated, we are well below a sustainable rate of inflation. The final push toward sustainable inflation levels will require a longer period of sustained higher rates than people imagine. Said another way: Getting to 4-5% inflation will happen by May 2023, but getting back to 2%-3% inflation will take longer and be more painful, triggering a sustained debate regarding the dual mandate of the Federal Reserve.

Karen Dynan: Inflation is very high no matter how you cut it. I would put the underlying trend in the United States at around 5%, which is way above the Fed’s target and the highest level in four decades. Interest rates have risen sharply over the past year as a result of the higher inflation and the Fed tightening in response. Rates on new mortgages have more than doubled relative to where they were a year ago. They touched 7% in October and November, a level we have not seen since the early 2000s.

Matt Klein: The inflation of the past few years has been attributable to the pandemic and, to a lesser extent, to the Russian invasion of Ukraine. Sudden changes in businesses’ ability to produce collided with sharp changes in the mix of goods and services that consumers wanted to buy, leading to both gluts and shortages across the economy.

The good news is that most of the inflation attributable to these one-off factors seems to be on its way out. Overall inflation probably peaked over the summer. The bad news is that there also seems to have been a modest uptick in the underlying rate of inflation from around 2% a year to 4-5% a year.  READ MORE...

Persistent Inflation

The International Monetary Fund warned Tuesday that there is a threat inflation will prove to be extra than simply transitory, pushing central banks to take pre-emptive motion.

The subject is presently dividing the funding neighborhood, which has been busy considering whether or not a current surge in shopper costs is right here to keep. 

In the U.S., the patron worth index got here in at 5.4% in June — the quickest tempo in virtually 13 years. In the U.Ok., the inflation rate reached 2.5% in June — the best stage since August 2018 and above the Bank of England’s goal of two%.

For probably the most half, the Washington-based establishment sees these worth pressures as transitory. 

“Inflation is expected to return to its pre-pandemic ranges in most countries in 2022,” the Fund stated in its newest World Economic Outlook replace launched Tuesday.

However, it warned that “uncertainty remains high.”

“There is however a risk that transitory pressures could become more persistent and central banks may need to take preemptive action,” the IMF stated.  READ MORE