Tourism-driven growth to propel global economy in 2023

global economy
The IMF expects the global economy to expand 3% in 2023, backed by the rise in post-pandemic travel and a robust job market.

The global economic growth is expected to remain subdued in 2023 and 2024 due to a variety of factors, but the International Monetary Fund has raised its growth forecast for the global economy to 3%, marking a 0.2% increase from its earlier projection in April. This slight improvement is attributed in part to a rise in post-pandemic travel, as noted in the latest economic review by the IMF. This positive trend is further supported by a robust job market and a flourishing services sector.

In May, the World Health Organisation (WHO) declared that the coronavirus pandemic no longer constitutes a global health emergency. However, the reverberations of the pandemic’s aftermath continue to be felt, as emphasised by Pierre-Olivier Gourinchas, the chief economist of the IMF. The initial three months of 2023 exhibited remarkable resilience in demand for services, outdoor activities, and travel and tourism.

READ | Gender-inclusive trade key to resilient global economy

The engine of growth is notably powered by nations recognised for their appeal to tourists. While manufacturing-centric countries have also experienced growth, it has been slightly less pronounced compared to the tourism sector. Recent data from the International Air Transport Association (IATA) indicates that global air traffic in May sustained its recovery, reaching 96.1% of pre-pandemic levels.

Nonetheless, the optimism associated with tourism-driven growth might wane in the upcoming months. Certain economies heavily reliant on tourism in southern Europe face limited room for further recovery, compounded by the adverse impacts of climate change. This region has been particularly devastated by wildfires.

Risks for global economy

Elevated consumer prices and heightened interest rates continue to cast a shadow over economic growth, particularly for developed nations. The risk profile remains elevated, with higher interest rates eroding consumer purchasing power, thus constraining growth prospects. To curb economic fervour, banks have increased interest rates, which now stand at their highest since the global financial crisis of 2008. Both the United States Federal Reserve and the European Central Bank are poised to raise borrowing costs again this week.

The global drive to combat inflation through policy tightening, including measures taken by the Reserve Bank of India, has led to an increase in borrowing costs, thereby restraining economic activity. The IMF underscores that the impact of elevated interest rates extends to public finances, disproportionately affecting poorer countries grappling with elevated debt burdens.

In addition, China’s fragile economic recovery looms as a significant risk. Ongoing debt issues in China’s property market contribute to ongoing uncertainty, as the country slowly recuperates from the pandemic.

Looking ahead, the global economic outlook is expected to remain hindered by the aftermath of the COVID-19 pandemic and the Ukraine crisis triggered by Russia’s invasion. The trajectory of China’s economic health, the spectre of inflation, and the elevated cost of borrowing are also among the paramount challenges confronting the global economy. This outlook falls short of the 3.8% average observed in the pre-pandemic years of 2000 to 2019.

Engines of global economic growth

In the year ahead, India and China are poised to lead in growth, while advanced economies, including Europe and the United States, are anticipated to expand at a more subdued pace. India’s growth is projected at 6.1% for 2023, reflecting a 0.2-percentage-point upward revision from the April estimate. This upward momentum can be attributed to a stronger-than-anticipated surge in domestic investment during the fourth quarter of 2022.

Several policy measures can bolster global economic growth. Governments worldwide should take proactive steps to combat inflation, while central banks in economies contending with persistent core inflation should maintain a restrictive stance until signs of cooling underlying inflation become evident. Premature easing before price pressures have sufficiently abated is cautioned against.

The IMF also advocates for the establishment of fiscal buffers, considering that fiscal deficits and government debt persist above pre-pandemic levels. Addressing this entails credible medium-term fiscal consolidation to restore budgetary flexibility and ensure sustainable debt levels. For economies with access to international markets, the pace of fiscal consolidation should be contingent on the strength of private demand.