The International Monetary Fund (IMF) has cut its growth forecasts for global economy for the fourth time this year, blaming the deteriorating outlook on Russia’s invasion of Ukraine, broadening inflation pressures and a slowdown in China.
In its latest world economic outlook report, the IMF warned that more than a third of the global economy will contract this year or next, while the three largest economies — the US, the EU and China — will continue to stall.
“In short, the worst is yet to come, and for many people 2023 will feel like a recession,” IMF chief economist Pierre-Olivier Gourinchas said.
In a separate Global Financial Stability report, the IMF warned of a potential “disorderly repricing” in markets, saying global financial stability risks have increased, raising the risks of contagion and spillovers of stress between markets.
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“It’s difficult to think of a time where uncertainty was so high,” said Tobias Adrian, director of the IMF’s Monetary and Capital Markets Department. “We have to go back decades to see so much conflict in the world, and at the same time inflation is extremely high,” he said.
The IMF expects global growth to remain unchanged in 2022 at 3.2 per cent but to slow to 2.7 per cent in 2023, 0.2 per cent lower than its most recent forecast. It also warned that there was a 25 per cent probability that growth could fall below 2 per cent.
Global inflation is forecast to rise from 4.7 per cent in 2021 to 8.8 per cent this year but to decline to 6.5 per cent in 2023 and to 4.1 per cent by 2024. The Washington DC-based fund warned that upside inflation surprises have been most widespread among advanced economies.
In its report, released as the first in-person IMF and World Bank annual meetings in three years took place, the fund said the policy trade-offs to address the cost-of-living crisis have become “acutely challenging”.
While central banks around the world are now “laser-focused” on restoring price stability, and the pace of tightening has accelerated sharply, it said there were risks — in terms of monetary policy — of both under and over-tightening
“Under-tightening would entrench further the inflation process, erode the credibility of central banks, and de-anchor inflation expectations. As history repeatedly teaches us, this would only increase the eventual cost of bringing inflation under control,” Mr Gourinchas said.
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“Over-tightening risks pushing the global economy into an unnecessarily harsh recession. As several prominent voices have argued recently, over-tightening is more likely when central banks act in an unco-ordinated fashion,” he said.
In its report, the fund said that the global economy continues to face steep challenges, shaped by the lingering effects of three powerful forces: the Russian invasion of Ukraine, a cost-of-living crisis caused by persistent and broadening inflation pressures, and the slowdown in China.
It said Russia’s invasion of Ukraine continues “to powerfully destabilise” the global economy. “Beyond the escalating and senseless destruction of lives and livelihoods, it has led to a severe energy crisis in Europe tha tis sharply increasing costs of living and hampering economic activity,” it said, noting gas prices in Europe have increased more than four-fold since 2021.
The crisis had raised the prospect of energy shortages this winter and beyond.
Tighter monetary policy, it said, will work their way through the economy, weighing demand down but helping “to gradually subjugate inflation”.
