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April 17, 2023

The IMF’s Rocky World Outlook - Flexport Weekly Economic Report

The IMF’s Rocky World Outlook - Flexport Weekly Economic Report

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Phil Levy

Chief Economist, Flexport

April 17, 2023

In its major forecast for global economic conditions, the International Monetary Fund sees a difficult year and ample downside risks. Although it’s not predicting many outright contractions, it does project a global slowdown in both trade and output growth this year.

In Focus - Slowing Trade Growth

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Last week the International Monetary Fund (IMF) updated its World Economic Outlook quarterly forecasts. The good news is that the downward revisions were less drastic than they have been in recent quarters: the major categories – output, prices, trade – are all expected to improve from 2023 to 2024. The bad news is that many of the numbers still look weak and risks abound. The report’s title – “A Rocky Recovery” – sets the mixed tone.

The economic growth forecast calls for world output to slow from 3.4% growth in 2022 to 2.8% in 2023 and then rebound to 3.0% in 2024. As is usually the case, Advanced Economies are seen as growing more slowly on average than Emerging Market and Developing Economies. Among the prominent Advanced Economies, only Germany (-0.1%) and the UK (-0.3%) are expected to contract in 2023. Relative to its January forecast, the IMF ‘awarded’ the biggest growth downgrade to Japan (-0.5pp), now seen as growing 1.3% in 2023 – still faster than its 1.1% rate in 2022.

Among Emerging Market and Developing Economies, Latin America slows notably, from 4.0% growth in 2022 to 1.6% in 2023, before rebounding to 2.2% in 2024. Emerging Asia maintains stronger growth, with China speeding from 3.0% in 2022 to 5.2% in 2023 then settling to 4.5% in 2024. Five ASEAN countries (Indonesia, Malaysia, Philippines, Singapore, and Thailand) as a group are to see growth drop from 5.5% to 4.5% in 2023, then 4.6% in 2024.

The chart above shows forecasts for trade volumes, including services alongside goods. Overall world trade volume growth is forecast to fall from 5.1% in 2022 to 2.4% in 2023 before climbing to 3.5% in 2024. There’s substantial variation between economies. Advanced economies see import and export growth drop sharply before partial recoveries. Emerging economies see a notably smaller drop in imports from 2022 to 2023. The falloff in Emerging export growth in 2023, as well as the stronger growth in 2024, were both marked down significantly from the January forecast (-0.6pp and -0.4pp, respectively).

The IMF attributes softer trade growth to a slowing of consumer demand growth in the wake of the pandemic and to a shift in spending back from traded goods toward domestic services (a shift we track with our Post-Covid Indicator).

Behind these numbers lies inflation and the policy remedies it prompts. The IMF forecasts world consumer price inflation steadily falling from 9.2% in 2022 to 5.6% this year and 3.7% in 2024. Those numbers are notably higher than in the January forecast, up 0.6pp for 2023. Perhaps more daunting, the IMF sees the price declines as concentrated in energy and commodities. Excluding food and energy, core inflation in 2023 is seen as dropping by only 0.2pp to 6.2%, a 0.5pp mark-up from January’s forecast.

This will continue to summon tightening monetary policy. As the report notes, that’s particularly problematic for countries with high levels of debt, where rising interest rates can make debt service untenable (also see below). Sounding a cautionary note, the IMF warns that “the fog around the world economic outlook has thickened.”

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Economic Developments

Headline inflation in the U.S. for March was up 5.0% year-on-year (0.1% month-on-month), but core inflation, which strips out food and energy prices and is one of the main measures watched by the Fed in setting monetary policy, remained stubbornly elevated, coming in at 5.6% after hitting a 14-month low of 5.5% in February. Services prices continue to rise, led by the 13.9% increase in transportation services compared to March last year.

U.S. wholesale inventories in February were 12.0% above the same month in 2022 after adjustment for seasonal and trading day variations, although they were virtually flat month-on-month following relatively minor revisions to the January data. By the latter measure, durable goods inventories were up 0.5% and non-durables down by the same amount.

China’s Q1 exports measured in U.S. dollars rose a slight 0.5% over Q1 2022 to $8.2 billion, while imports were down 7.1% to $6.2 billion. Exports to the U.S. fell 17.0% and by 7.1% to the EU; they increased by 47.1% to Russia, however, albeit from a far lower base. Total “Hi-tech” exports, which includes semiconductors and LCD panels, were 15.7% lower year-on-year in dollar terms.

UK GDP estimates for February showed no growth, leaving monthly GDP just 0.3% above pre-COVID levels (marked as February 2020). A 2.4% expansion in the construction offset downturns in services and production, which contracted by 0.1% and 0.2% respectively.

Retail sales in the Euro area continued on their jagged downward path in February, decreasing 0.8% month-on-month in volume terms, equating to a 3.0% fall year-on-year on a calendar-adjusted basis. Germany and France were down 1.3% and 1.5%, respectively, month-on-month and by the same measures.

Political Developments

Among the litany of risks highlighted in the IMF’s latest Global Financial Stability Report are the non-banking sector’s exposure to illiquid credit investments, along with sovereign debt in emerging and frontier markets as borrowing costs continue to rise. The Fund appears to have adopted a new policy with regards to the latter by asking Ghana, which defaulted last year, to deal with domestic debt as a condition of its relief facility.

U.S. - EU trade relations were in the spotlight last week, with the European Commission VP and Trade Commissioner saying that both sides must “deliver more” on trade ahead of the next meeting of the bilateral Trade and Technology Council, scheduled for May. The commissioner also called for negotiations on critical minerals to be concluded swiftly, following the recent announcement of a U.S. - Japan deal on the same matter. Meanwhile, the OECD expressed concern about such agreements in a recent report, which it said could have negative effects on supply and thus prices.

Disclaimer: The contents of this report are made available for informational purposes only and should not be relied upon for any legal, business, or financial decisions. Flexport does not guarantee, represent, or warrant any of the contents of this report because they are based on our current beliefs, expectations, and assumptions, about which there can be no assurance due to various anticipated and unanticipated events that may occur. This report has been prepared to the best of our knowledge and research; however, the information presented herein may not reflect the most current regulatory or industry developments. Neither Flexport nor its advisors or affiliates shall be liable for any losses that arise in any way due to the reliance on the contents contained in this report.

About the Author

phil levy headshot
Phil Levy

Chief Economist, Flexport

April 17, 2023

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