- Global GDP growth this year cut to 3.2% from 3.6% in April while 2023 forecast clipped 2.9% due emerging downside risks from high inflation and Ukraine war
- IMF said world GDP contracted in the second quarter due to downturns in China caused by its COVID-related lockdowns and in Russia, arising from its invasion of Ukraine
- The fund also said the downgrades reflect stalling growth in the United States, China and Europe and its important consequences for the global outlook
The International Monetary Fund on July 26 cut its global economic forecast this year, saying world real GDP growth will slow to 3.2% from 3.6% forecast in April, warning that downside risks from high inflation and the Ukraine war could lead the brink of recession if left unchecked.
In his update of IMF’s World Economic Outlook, chief economist Pierre-Olivier Gourinchas said that world GDP actually shrank in the second quarter due to downturns in China and Russia.
For 2023, IMF cut its growth forecast to 2.9% from the April estimate of 3.6%, citing the impact of tighter monetary policy.
World growth had rebounded in 2021 to 6.1% after the COVID-19 pandemic crushed global output in 2020 with a 3.1% contraction, but the new wave of infections in China and the six-month-old Russian war on Ukraine have stalled growth, IMF said.
“The outlook has darkened significantly since April. The world may soon be teetering on the edge of a global recession, only two years after the last one,” Gourinchas told a news conference. His analysis was published on the IMFBlog page of the IMF website.
He said in IMF’s baseline forecast, growth this year and next had been downgraded by 0.4 and 0.7 percentage points from April to reflect stalling growth in the United States, China and the Europe – with important consequences for the global outlook.
“In the United States, reduced household purchasing power and tighter monetary policy will drive growth down to 2.3% this year and 1% next year,” Gourinchas said.
“In China, further lockdowns and the deepening real estate crisis pushed growth down to 3.3% this year – the slowest in more than four decades, excluding the pandemic.”
The economist said growth “in the euro area is revised down to 2.6% this year and 1.2% in 2023, reflecting spillovers from the war in Ukraine and tighter monetary policy.” Despite slowing activity, global inflation has been revised up, in part due to rising food and energy prices.
IMF said inflation this year should reach 6.6% in advanced economies and 9.5% in emerging market and developing economies – upward revisions of 0.9 and 0.8 percentage points, respectively – and should remain elevated longer.
Inflation has also broadened in many economies, reflecting the impact of cost pressures from disrupted supply chains and historically tight labor markets.
IMF said the risks to the outlook are overwhelmingly tilted to the downside:
- The war in Ukraine could lead to a sudden stop of European gas flows from Russia
- Inflation could remain stubbornly high if labor markets remain overly tight or inflation expectations de-anchor, or disinflation proves more costly than expected
- Tighter global financial conditions could induce a surge in debt distress in emerging market and developing economies
- Renewed COVID-19 outbreaks and lockdowns might further suppress China’s growth
- Rising food and energy prices could cause widespread food insecurity and social unrest
- Geopolitical fragmentation might impede global trade and cooperation.
“In a plausible alternative scenario where some of these risks materialize, including a full shutdown of Russian gas flows to Europe, inflation will rise and global growth decelerate further to about 2.6% this year and 2% next year – a pace that growth has fallen below just five times since 1970.,” Gourinchas said.
“Under this scenario, both the United States and the euro area experience near-zero growth next year, with negative knock-on effects for the rest of the world.”
IMF said today’s high inflation is a clear risk for current and future macroeconomic stability and bringing it back to central bank targets should be the top priority of policymakers.
The fund said that central banks of major advanced economies are withdrawing monetary support faster than expected in April, while many in emerging market and developing economies already started raising interest rates last year.
Gourinchas said “synchronized monetary tightening across countries is … unprecedented and will inevitably have real economic costs, but delaying it will only exacerbate the hardship. Central banks that have started tightening should stay the course until inflation is tamed.”
He said as advanced economies raise interest rates to fight inflation, financial conditions are tightening, especially for their emerging-market counterparts. He urged countries to use macroprudential tools appropriately to safeguard financial stability.
Gourinchas said the share of low-income countries in high risk of debt distress at 60%, up from about 20% a decade ago. Higher borrowing costs, diminished credit flows, a stronger dollar and weaker growth will push even more into distress.
“Multilateral cooperation will be key in many areas, from climate transition and pandemic preparedness to food security and debt distress. Amid great challenge and strife, strengthening cooperation remains the best way to improve economic prospects and mitigate the risk of geo-economic fragmentation,” he said.
