The IMF has cut its global growth forecasts and raised its inflation projections, warning that risks to the economic outlook are “overwhelmingly tilted to the downside”.
The downgraded estimates, released on Tuesday, come as the world grapples with the fallout from Russia’s invasion of Ukraine, prolonged disruptions caused by the pandemic and rapidly tightening financial conditions, with central banks seeking to contain the increase in prices.
The fund now expects gross domestic product growth to slow to 3.2% in 2022, down 0.4 percentage points from its April estimate and about half the pace of expansion for the year past In 2023, global growth will further weaken to 2.9%. Just three months ago, that estimate was 0.7 percentage points higher.
Global inflation is likely to intensify, with the IMF raising its forecasts for this year and next by almost a full percentage point to 8.3% and 5.7%, respectively.
The multilateral lender said the economic outlook had become much darker and “extraordinarily uncertain”, with inflation at record highs and challenges to growth mounting.
Pierre-Olivier Gourinchas, the IMF’s top economist, warned in an interview that it will also be an environment that will test the “courage” of central banks around the world to keep raising interest rates to try to restore price stability even if the economy slows down. ,
“We are here at a very critical time,” he said. “It’s easy to cool the economy when the economy is heating up. It’s much harder to reduce inflation when the economy is close to a recession.”
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The risk of a recession is “particularly prominent” in 2023, because next year growth is expected to bottom out in several countries, savings stocks built up during the pandemic will have been reduced and “even small shocks could cause economies to explode.”
One “plausible” scenario the fund outlined is a sharp reduction in Russian energy exports, including a complete cutoff of the country’s gas supplies to Europe, which could further push back growth and ignite new price pressures.
But Gourinchas stopped short of labeling the coming economic environment as “stagnationist,” akin to the 1970s, maintaining that central banks have much more credibility now than they did then. He said, however, that “the risk that we will have a global recession has increased [and] inflation will remain more persistent than we expected”.
The most pessimistic growth forecasts were downgrades in the world’s largest economies.
Hampered by extensive Covid-19 lockdowns, China’s economy will expand just 3.3% this year, 1.1 percentage points less than forecast in April and the slowest growth in more than four decades apart from the 2020 crash.
For the United States, last year’s 5.7% expansion is forecast to more than halve to 2.3% in 2022, before falling even further the following year to just ‘1%, as rising inflation consumes households’ ability to buy goods and services. consumption falls and the Federal Reserve’s historically aggressive monetary tightening campaign begins to bite.
Compared to the April projections, the new estimates are each more than 1 percentage point lower.
Adjusted for inflation, “real” GDP growth in the US is expected to be just 0.6% year-on-year in the fourth quarter of 2023. you could call it a technical recession,” Gourinchas said.
He added that emerging markets had become a major concern as the Fed’s tightening cycle raises borrowing costs globally. While the “messy” conditions in financial markets had not yet taken root, he said, the big wild card was how much additional pressure economies can withstand.
Emerging markets are likely to come under even more intense pressure if the fund’s alternative scenario of a sharp drop in Russian oil and gas exports plays out, with rising inflation expectations and central banks forced to tighten monetary policy even more aggressively.
Under these circumstances, global growth is expected to slow in 2022 and 2023 to 2.6% and 2%, respectively. According to the fund, it has fallen below 2% only five times since the 1970s.
Europe, which already has much lower growth this year than previously forecast, would also be disproportionately affected. The IMF had already revised down its projections to an expansion of 2.6% in 2022 and 1.2% in 2023, with the outlook for Germany substantially lower than expected in April. Next year, its economy is expected to grow by just 0.8%.
A cessation of Russian gas exports could shave a further 1.3 percentage points off Europe’s growth forecast for 2023, leading to “near-zero regional growth”.
This is likely to spell more trouble for the European Central Bank, which is already facing challenges such as how to raise interest rates to fight inflation without triggering a new euro zone debt crisis.
Gourinchas said a bond-buying tool unveiled by the ECB last week could have a “very big calming effect” on markets, but said it would be a “delicate exercise” to achieve.