- IMF says pressures from the Russia-Ukraine war, spiralling energy and food prices, inflation and interest rate spikes have led the Fund to trim its 2023 global GDP forecast to 2.7%
- IMF’s chief economist says central banks fighting inflation must avoid over-tightening to so as not to push the global economy into “unnecessarily severe recession”
- The appropriate response in most emerging and developing countries is to calibrate monetary policy to stabilize prices and conserve valuable foreign reserves for tougher times
Colliding pressures from the Russia-Ukraine war, high energy and food prices, inflation and sharply higher interest rates drove the International Monetary Fund on October 10 to cut its global growth forecast for 2023, warning that “the worst is yet to come” next year.
In its latest World Economic Outlook for October 2022 entitled “Countering the Cost-of-Living Crisis,” the Fund forecasts that one-third of the world economy will likely contract by next year, IMF chief economist Pierre-Olivier Gourinchas said in a companion statement summarizing the report.
“The three largest economies, the United States, China and the euro area, will continue to stall,” said Gourinchas. “In short, the worst is yet to come, and for many people, 2023 will feel like a recession.”
Global GDP growth will slow to 2.7%, compared with a 2.9% forecast in July, as higher interest rates drag the US economy down, Europe grapples with gas prices spiralling up and China continues COVID-19 lockdowns and struggles to shore up its property sector, the IMF said.
For 2022, the Fund kept growth at 3.2% as a stronger-than-expected European output balanced a weaker US performance. Still, that’s nearly half the torrid 6.0% global growth in 2021.
The Fund said US growth this year will be a meager 1.6%, downgraded by 0.7 percentage point from July, due to an unexpected second-quarter GDP contraction.
“In the United States, the tightening of monetary and financial conditions will slow growth to 1% next year. In China, we have lowered next year’s growth forecast to 4.4% due to a weakening property sector and continued lockdowns,” Gourinchas said.
“The slowdown is most pronounced in the euro area, where the energy crisis caused by the war will continue to take a heavy toll, reducing growth to 0.5% in 2023. Almost everywhere, rapidly rising prices, especially of food and energy, are causing serious hardship for households, particularly for the poor.”
The IMF said central banks need a delicate balancing act to fight inflation without over-tightening, which could push the global economy into an “unnecessarily severe recession,” disrupt financial markets and cause pain for developing countries. But it pointed squarely at controlling inflation as the bigger priority.
Increasing price pressures remain the most immediate threat to current and future prosperity by squeezing real incomes and undermining macroeconomic stability. Central banks are now laser-focused on restoring price stability, and the pace of tightening has accelerated sharply.
The IMF expects headline consumer price inflation to peak at 9.5% in the third quarter of 2022 and gradually decline to 4.7% by the fourth quarter of 2023. It put a 25% probability of global growth falling below 2% next year, a phenomenon that has occurred only five times since 1970, and said there was a more than 10% chance of a global GDP contraction.
Gourinchas said downside risks to the outlook remain elevated, while policy trade-offs to address the cost-of-living crisis have become more challenging. Among those highlighted in the report:
- The risk of monetary, fiscal, or financial policy miscalibration has risen sharply amid high uncertainty and growing fragilities.
- Global financial conditions could deteriorate and the dollar could strengthen further should turmoil in financial markets erupt, pushing investors towards safe assets. This would add significantly to inflation pressures and financial fragilities in the rest of the world, especially emerging markets and developing economies.
- Inflation could again prove more persistent, especially if labor markets are too tight.
- Finally, further escalation the war in Ukraine can exacerbate the energy crisis.
“We estimate that there is about a one in four probability that global growth next year could fall below the historically low level of 2%. If many of the risks materialize, global growth would decline to 1.1% with quasi stagnant income-per-capita in 2023. According to our calculations, the likelihood of such an adverse outcome, or worse, is 10% to 15%,” Gourinchas said.
He said the appropriate response in most emerging and developing countries is to calibrate monetary policy to maintain price stability while letting exchange rates adjust, conserving valuable foreign exchange reserves for when harsher financial conditions.
“As the global economy is headed for stormy waters, now is the time for emerging market policymakers to batten down the hatches,” he said.
