The International Monetary Fund (IMF) has cut its global growth forecast for 2023 due to a collision of economic pressures such as the war in Ukraine, high energy and food prices and sharply higher interest rates.
The IMF warned on Tuesday that conditions could worsen significantly next year and said it expected more one third of the world economy will shrink.
“The three largest economies – the US, China and the Eurozone – will continue to stagnate,” said Pierre-Olivier Gourinchas, the IMF’s chief economist. “In short, the worst is yet to come, and for many people, 2023 will feel like a recession.”
The IMF said in its World Economic Outlook that global GDP growth next year will slow to 2.7 percent, down from a forecast of 2.9 percent in July, as high interest rates slow the U.S. economy, Europe struggles with rising gas prices and China struggles with ongoing COVID. -19 lockdowns and a weakening property sector.
The fund maintains its growth forecast for 2022 at 3.2 percent, reflecting stronger-than-expected output in Europe but a weaker performance in the U.S. after 6 percent global growth in 2021.
U.S. growth this year is forecast to be a meager 1.6 percent – down 0.7 percentage points from July. The decline reflects an unexpected second-quarter GDP contraction. The IMF kept the US growth forecast for 2023 unchanged at 1 percent.
Growth in the Eurozone will fall to 0.5 percent next year, with some major economies including Germany and Italy entering technical recession, the IMF forecasts, as high energy prices drag down output. Gourinchas said geopolitical changes in the continent’s energy supply will be “widespread and permanent” and will keep prices high for a long time.
As for market turmoil in Britain after financial markets slammed the new government’s proposed tax cuts, Gourinchas said UK fiscal policy should be in line with the central bank’s inflation targets.
The future health of the global economy “critically depends” on the successful calibration of monetary policy, the outcome of the war in Ukraine and the possibility of future supply disruptions related to the pandemic, the IMF said.
Economic Futures said central banks face a delicate balancing act to fight inflation without tightening too much, which could push the global economy into an “unnecessarily severe recession” and cause disruptions in financial markets and pain for developing countries. But he cited controlling inflation as a bigger priority.
“If central banks once again misjudge the stubborn persistence of inflation, their hard-won credibility could be undermined,” Gourinchas said. “This will further damage macroeconomic stability going forward.”
However, price pressures have so far proved “quite persistent and a major source of concern for policymakers,” the IMF said, expecting global inflation to peak at 9.5 percent in late 2022. It is forecast to fall to 4.1 percent by 2024 and “remain high for longer than previously expected.”
A “reasonable combination of shocks” could significantly darken the outlook, including a 30 percent rise in oil prices from current levels, which the IMF said would reduce global growth to 1 percent next year, driven by a broad decline in real incomes.
Other components of this “downside scenario” include a sharp drop in investment in China’s property sector, a sharp tightening of financial conditions as a result of depreciating emerging market currencies, and overheated labor markets.
The IMF sees a 25 percent chance that global growth will fall below 2 percent next year, which has happened just five times since 1970. He said that the probability of global GDP decline is more than 10 percent.
These shocks could push inflation higher for longer, which in turn could keep upward pressure on the US dollar, which is at its strongest since the early 2000s. The IMF said the strength of the dollar is putting pressure on emerging markets and could increase the likelihood of debt distress for some countries.
But Gourinchas said the dollar’s strength is currently the result of more aggressive monetary tightening, rather than underlying economic forces, including unruly markets in the United States.
The World Economic Outlook was released as the IMF and World Bank began their annual meeting for the first time in three years. Emerging market debt relief is expected to be a key topic of discussion among the world’s global financial policymakers at meetings in Washington, and Gourinchas said now is the time for emerging markets to “batt the hatches” to prepare for tougher conditions. .
Gourinchas advises that the appropriate policy for most emerging economies is to prioritize monetary policy for price stability, allow currencies to adjust, and “hold valuable foreign reserves when financial conditions really deteriorate.”