The International Monetary Fund (IMF) has increased China's growth forecast for 2023 to 5.9 percent after the country revised its strict COVID-19 measures and reopened its economy.
IMF head economist Pierre-Olivier Gourinchas said China would be an "engine" that benefits the economic situations of other countries. Following China's reopening last month, the global economy is expected to grow by 3.2 percent this year.
This growth rate will significantly improve compared to last year when the global economy posted a 1.9 percent growth rate.
Gourinchas explained that China's new policy would improve the supply chain issues affecting countries worldwide in recent years. Those issues have been acknowledged as contributing factors to high inflation rates in various parts of the world.
Despite the better outlook on China's economy this year, the IMF warned that it still must tackle its domestic economic problems. One of the most pressing issues for Xi Jinping's administration at the moment is the real estate crisis, which started in 2021 when mega-developer Evergrande defaulted on its debt.
IMF predicted that China's growth in 2024 would stall slightly compared to this year at a 4.5 percent rate. The country's economic growth may also fall below the four percent rate in the medium term.
The organization attributed China's slowing growth to the lack of structural reforms. Data has also shown the declining business dynamism in the territory.
China and India will simultaneously lead global economic growth this year, contributing up to 50 percent. Meanwhile, the U.S. and European zone will contribute 10 percent of global growth.
India is a large economy projected to post the highest growth in 2023. In Q4 of this year, India will likely report up to a seven percent year-to-year increase.
Based on IMF data, the U.K. will be the only G7 country to record an economic contraction this year. In Q4 of 2023, the country will post a 0.5 percent decline compared to the previous year.
Gourinchas said this year "could well represent a turning point" for the global economy. In the subsequent years, IMF's calculations show that the cumulative growth rate will continue to increase.
The chief economist even said a global recession would not occur. Yet, it contradicts IMF managing director Kristalina Georgieva's earlier prediction that a third of the world economy would hit a recession in 2023.
According to Gourinchas, China's better economic outlook and falling energy prices in Europe prompted the IMF to revise its projection.
U.S. to grow by 1% in 2023
The IMF did not change its October 2022 forecast on U.S. growth, predicting a one percent growth rate by the end of this year. However, the committee noted that the country's performance last year was better than expected.
Gourinchas said the U.S. was on a "narrow path" to avoid a recession. He added that higher benchmark rates would "cool off the economy and bring down inflation." The Federal Reserve will likely raise interest rates by 25 basis points in the upcoming meeting.
IMF monetary and capital markets director Tobias Adrian warned the market that interest rates in the U.S. could inflate more than expected. It would also take a while for the rates to come down.
"There's certainly a wedge in between what policymakers are communicating and what's priced into markets," Adrian said. "There is still a lot of upside risk to inflation . . . Until it is very clear that inflation is coming down in a durable fashion . . . it is still necessary to continue to tighten monetary policy."