Question Period Note: IMF World Economic Outlook (WEO) – April 2023

The IMF released its April 2023 World Economic Outlook (WEO) on April 11

• The IMF expects the global economy to slow in 2023.

• There is a great deal of uncertainty in the global outlook as the world economy is facing many headwinds, notably with high inflation and central banks swiftly raising rates.

• Canada is not immune to the challenges that economies around the world are facing, and the IMF also expects the Canadian economy to slow in 2023.

• Canada is faring better than other G7 countries in these uncertain times. The IMF projects that Canada will have the strongest economic growth in the G7 on average in 2023 and 2024.

• The IMF’s latest projections also show that Canada is expected to maintain its position as the country with the smallest general government deficit as a share of GDP among G7 countries, and still by far the lowest general government net debt as a share of GDP in the G7.

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• Global Outlook: The IMF projects global economic growth to slow from 3.4% in 2022 to 2.8% in 2023 and 3.0% in 2024 (both down 0.1 p.p. from January), well below the average of 3.8% from the past two decades. An alternative scenario looking at a worsening of financial stress shows global growth slowing to about 2.5% in 2023 – “the weakest growth since the global downturn of 2001, barring the initial COVID-19 crisis in 2020 and during the global financial crisis of 2009.” The IMF also warns that weak growth would likely persist for years, with global growth estimated at 3% looking ahead to 2028, the lowest medium-term forecast since 1990.

• Inflation Developments: The IMF forecasts that global headline inflation will slow from 8.7% in 2022 to 7.0% in 2023, mostly due to lower commodity prices and easing inflation in goods prices, while core measures of inflation are set to decline more slowly. With global inflation expected to fall to 4.9% in 2024, the IMF believes that “return to target is unlikely before 2025 in most cases.”

• Canadian Economic Outlook: The IMF expects real GDP in Canada to expand by 1.5% in both 2023 and 2024 (both unchanged from January). The Canadian economy is expected to see the fastest rate of growth among the G7 on average in 2023 and 2024 (2nd highest in the G7 for 2023, and tied for 1st in 2024).

• Canadian Fiscal Outlook: Canada’s general government deficit is projected to narrow from a peak of 10.9% of GDP in 2020 to 0.4% in both 2023 and 2024, the lowest in the G7. Canada has achieved the fastest pace of deficit reduction in the G7 since 2020. While the IMF expects Canada’s net debt-to-GDP ratio to edge up slightly in 2023, it is expected to decline thereafter. Moreover, the IMF expects the ratio to remain by far the lowest among G7 countries and lower than some other AAA countries such as the Netherlands and Australia.

• Risks: The IMF says that risks to the global outlook are skewed to the downside, with “the chances of a hard landing having risen sharply” lately with the turmoil in the banking sector and financial stability concerns. Financial sector stress could increase and spread to other sectors, leading to a severe deterioration of financing conditions and “compelling central banks to reconsider their policy paths.” In the context of higher borrowing costs and lower growth, pockets of sovereign debt distress could “spread and become more systemic.” The war in Ukraine could intensify and lead to more food and energy price surges, while core inflation could turn out more persistent than initially expected.

• Policy Recommendations: The IMF notes that policy makers have “a narrow path to walk” toward restoring price stability, while avoiding a recession and maintaining financial stability. Central banks need to remain steady in their fight over inflation, but also need to remain ready to adjust and use the full set of policy instruments, including to address financial stability concerns. Fiscal policy should support monetary policy in getting inflation back to target, and should be tight in most cases. Measures to address structural factors impeding supply could improve medium-term growth, while steps to strengthen multilateral cooperation, including by mitigating the costs of climate change and reducing the adverse effects from “geoeconomic” fragmentation, are essential to create a more resilient world economy.