The full impact of tightening financial conditions is yet to materialize, International Monetary Fund's (IMF) chief said Thursday, warning that central banks have some way to go in their inflation battle.

IMF Managing Director Kristalina Georgieva said 2023 would be another "tough year" for the global economy, and inflation remained stubborn, but she did not expect another year of successive downgrades like those seen last year, barring unexpected developments.

Global growth is expected to slow further this year, as central banks, including the U.S. Federal Reserve (Fed), have raised interest rates to cool surging prices. While sectors like housing have been reeling in the United States, for instance, the labor market remains strong with low joblessness.

The International Monetary Fund is not likely to downgrade its forecast for 2.7% growth in 2023, Georgieva told reporters in a briefing on the world economy, noting that a feared oil price spike had failed to materialize and labor markets remained strong.

'Job not yet done'

"As long as people are employed, even if prices are high, consumers spend ... but we all know that the impact of tightening financial conditions is yet to bite, in terms of unemployment," the head of the global lender said.

"Inflation remains stubborn, and in that sense, the job of central banks is not yet done," she said.

This suggests central banks may need to continue hiking interest rates, walking a fine line between easing demand and avoiding tipping economies into recession.

Doing so comes with risks, and Georgieva stressed the need to watch how tightening conditions hit the labor market and possibly translate into "more tensions between employers and workers."

Governments have been quick to provide policy support thus far, adding a buffer between consumers and surging food and energy costs, but this policy space is "shrinking," she cautioned.

Bottoming out

The International Monetary Fund also expects the global slowdown to "bottom out" toward year-end, and for the world economy to trend toward a higher growth trajectory in 2024, Georgieva said.

The IMF in October forecast that global growth would slow to 2.7% in 2023 after falling from 6% in 2021 to 3.2% in 2022. It had previously forecast growth of 2.9% for 2023, but Georgieva said she did not expect further cuts to the outlook.

The IMF maintains a view that a "global recession can be avoided" even if some countries see downturns. But this is subject to an absence of negative shocks like growing social unrest and spillovers between countries, climate events, or a worsening in Russia's invasion of Ukraine.

"We are now in a more shock-prone world," Georgieva said.

While tighter financial conditions will have a "dramatic" impact on countries with high debt levels, Georgieva said the IMF does not see a "systemic debt crisis on the horizon."

She added that a new global sovereign debt roundtable is set to meet for the first time in February, on the sidelines of a Group of 20 (G-20) finance officials meeting, bringing key creditors and private finance together.

'Stay the course'

Weighing in on specific countries, Georgieva noted that China needs to "stay the course" in reopening from nearly three years of a strict zero-COVID-19 policy that has battered business activity.

China's rebound from its latest surge in coronavirus cases since recently lifting lockdowns, quarantines and mass testing would have significant implications globally, she said.

The world's second-biggest economy used to deliver up to 40% of world growth.

"What is most important is for China to stay the course, not to back off from that reopening," Georgieva said. If so, it could turn into a "positive contributor" to average global growth by mid-year or thereabouts, she added.

Meanwhile, Georgieva expressed optimism over "remarkable" market resilience in the United States, with COVID-era support helping consumer demand in the world's biggest economy.

The IMF in October forecasted U.S. gross domestic product (GDP) growth for 2023 at 1.0%, a projection it will update this month. The World Bank on Tuesday forecasted U.S. growth at 0.5% for 2023.

"It gives some ... expectation that the U.S. would avoid falling into a recession," Georgieva said, adding that a potential downturn will likely be very mild.

"For now, the dynamic seems to be more indicative of a soft landing," she added.