The latest economic outlook from the IMF is more bad news
The International Monetary Fund has bad news for the Big 3 – the United States, China and the Eurozone – and the world economy.
“The world may soon be on the brink of a global recession, just two years after the last one,” IMF chief economist Pierre-Olivier Gourinchas writes in his latest blog, “Global Economic Growth Slows Amid Gloomy and More Uncertain Outlook”.
Slowing growth and the rising specter of inflation represent a grim global economic outlook. At the same time, the aftershocks of the ongoing Covid-19 pandemic and the war between Russia and Ukraine continue to dog the global economic recovery.
But the forecast of economic gloom extending to 2023 was always in sight, given the grim picture IMF director Kristalina Georgieva painted in her recent blog post.
Big 3 Drag World Economy
The United States, China and the euro area account for around 50% of the world economy. Any economic recession in these countries, as Gourinchas points out in his blog, will drag down the global economic recovery.
“Growth slows from 6.1 percent last year to 3.2 percent this year and 2.9 percent next year, down 0.4 and 0.7 percentage points from April This reflects stagnant growth in the world’s three largest economies,” the latest World Edition blog. Read Economic perspectives.
Inflation in the US and major European economies is a cause for concern. The United States, in particular, posted inflation above 9 percent in July, prompting the US Federal Reserve to raise interest rates by 0.75 percentage points for the second time in a row.
The fight against inflation has been exacerbated by real fears that the US economy is going into recession. The economy contracted for the second consecutive quarter and fell 0.9% in the past three months. In the first quarter, the economy shrank by 1.6 percent.
In China, continued local lockdowns due to COVID-19 are negatively impacting the economy. Its economy reportedly contracted 2.6 percent in the April-June quarter. The IMF has also lowered China’s economic growth rate to 3.3% for 2022, which is the lowest in four decades. It has also revised China’s economic growth forecast for 2023 to 1.3%.
“China’s slowdown has been worse than expected amid Covid-19 outbreaks and lockdowns,” the blog read.
In particular, the unraveling housing crisis in China may further cripple economic expansion in the coming quarters.
The fallout from the war in Ukraine and its impact on gas prices is likely to be the biggest economic pain for the eurozone. Gas prices rose 30 percent in just two days after Russia – the country is Europe’s dominant energy power – cut off supplies from Nord Stream 1.
The centrality of natural gas to the European economy can be summed up in this statement from the European Central Bank’s Economic Bulletin: “Significant increases in natural gas prices can dampen economic activity through both the consumption and goods channels intermediates”.
The war in Ukraine and tighter monetary policy to tackle inflation has forced the IMF to cut its forecasts for the euro zone from 2.6% this year and 1.2% in 2023 .
Inflation worries the whole world
Fighting inflation seems to be the need of the hour. “Countries must do everything in their power to reduce high inflation,” Georgieva had written in her recent blog.
According to the July economic outlook, inflation is expected to reach 6.6% in advanced economies and 9.5% in emerging markets, a revision of 0.9 and 0.8 percentage points, respectively.
“Inflation at current levels represents a clear risk to current and future macroeconomic stability, and bringing it back to the central bank’s targets should be a top priority for policymakers,” Gourinchas suggests in his blog.
The IMF has warned that inflationary risks will slow global economic growth, particularly affecting the US and the euro area.
These risks include:
1) The complete stoppage of Russian gas flow, which will increase gas prices in energy-dependent Europe,
2) An uptick in debt crises in emerging markets due to tighter financial conditions due to central banks’ fight against inflation.
3) Tighter labor markets (especially in advanced countries).
According to IMF estimates, if these risks materialize, the global growth rate will fall to 2.6% and 2% next year, while the United States and the eurozone may see almost zero growth in 2023.
“Synchronized monetary tightening” around the world will have real economic costs, Gourinchas writes. So while central banks will seek to control inflation, economic growth may be a casualty.
Central banks around the world are now facing the challenge of a “soft landing,” a popular American phrase to denote a central bank policy that keeps inflation under control and helps the economy grow.
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