The three largest economies will “continue to falter”, “the worst is yet to come”, and for many people 2023 will feel like a recession, she warned.
The International Monetary Fund (IMF) has lowered its global growth forecast for 2023 amid economic pressures from the war in Ukraine, high energy and food prices and sharply higher interest rates.
The IMF warned on Tuesday that conditions could deteriorate significantly next year and said it expected more than a third of the world economy is shrinking.
“The three largest economies — the United States, China and the eurozone — will continue to falter,” said IMF chief economist Pierre-Olivier Gourinchas. “In short, the worst is yet to come, and for many people, 2023 will feel like a recession.”
In its World Economic Outlook, the IMF said global GDP growth will slow to 2.7 percent next year, compared with a 2.9 percent forecast in July, as higher interest rates slow the economies of the United States, Europe is struggling with soaring gas prices and China is grappling with ongoing COVID-19 lockdowns and a flagging real estate sector.
The fund is keeping its growth forecast for 2022 at 3.2 percent, reflecting stronger-than-expected production in Europe but weaker performance in the US after surging global growth of 6 percent in 2021.
US growth this year is forecast at a meager 1.6 percent – a 0.7 percentage point downgrade from July. The decline reflects an unexpected drop in GDP in the second quarter. The IMF left its US growth forecast for 2023 unchanged at 1 percent.
Eurozone growth will fall to 0.5 percent next year as high energy prices squeeze output, the IMF predicted, and some key economies, including Germany and Italy, will enter technical recessions. Gourinchas said the geopolitical shifts in the continent’s energy supply will be “wide and permanent” and will keep prices high for a long time.
Referring to the market turmoil in the UK after financial markets rejected the new government’s proposed tax cuts, Gourinchas said UK fiscal policy must keep pace with the central bank’s inflation targets.
The future health of the global economy “relies critically” on the successful calibration of monetary policy, the trajectory of the war in Ukraine and the possibility of further pandemic-related supply-side disruptions, the IMF said.
The economic future, it said, is subject to a delicate balancing act by central banks to fight inflation without tightening it, which could push the global economy into an “unnecessarily severe recession” and cause disruption in financial markets and pain in developing countries. But it clearly indicated that controlling inflation is the bigger priority.
“Central banks’ hard-won credibility could be eroded if they again miscalculate the stubborn persistence of inflation,” Gourinchas said. “This would prove much more detrimental to future macroeconomic stability.”
So far, however, price pressures are proving to be “rather persistent and a major cause for concern for policymakers,” the IMF said, adding while it expects global inflation to peak at 9.5 percent in late 2022. They are forecast to “remain elevated for longer than previously expected”, falling to 4.1 percent by 2024.
A “plausible combination of shocks,” including a 30 percent rise in oil prices from current levels, could significantly darken the outlook, the IMF said, pushing global growth to 1 percent next year, a level consistent with sharply falling real incomes connected is.
Other components of this ‘downside’ scenario include a sharp drop in investment in China’s real estate sector, a significant tightening in financing conditions due to currency depreciation in emerging markets and continued overheated labor markets.
The IMF projects a 25 percent chance that global growth will fall below 2 percent next year, a phenomenon that has only occurred five times since 1970. He said the probability of a global GDP contraction is more than 10 percent.
These shocks could keep inflation higher for longer, which in turn could keep upward pressure on the US dollar now at its strongest since the early 2000s. The IMF said the dollar’s strength is putting pressure on emerging markets and could increase the likelihood of a debt crisis for some countries.
However, Gourinchas said the dollar’s strength is currently the result of underlying economic forces, including more aggressive monetary tightening in the US, and not unruly markets.
The World Economic Outlook was released as the IMF and World Bank began their first in-person annual meeting in three years. Debt relief for emerging markets is expected to be a major topic of discussion among global financial leaders at the Washington, DC meetings, and Gourinchas said now is the time for emerging markets to “close the hatches” to prepare for tougher conditions to prepare .
Appropriate policy for most emerging markets is to prioritize monetary policy on price stability, allow currencies to adjust and “reserve valuable foreign exchange reserves if financial conditions really deteriorate,” advised Gourinchas.