The International Monetary Fund expects a “very painful” outlook for the global economy

The International Monetary Fund said there is a growing risk that the global economy will slip into recession next year as households and businesses in most countries face “storm waters”.

China’s non-spreading coronavirus policy and fragile housing market, the need to raise interest rates to control inflation in advanced economies, and higher energy and food prices after the Russian invasion of Ukraine will reduce global economic growth from 3.2 percent in 2022 to 2.7 percent thereafter. . General, the fund predicted.

The growth forecast for 2023 is the lowest for next year published by the International Monetary Fund since 2001, regardless of the years of the coronavirus pandemic and the aftermath of the global financial crisis.

Fund economists saw a greater chance that the global economy would do worse than its central forecast and a 25 percent chance that growth would fall below 2 percent. That would represent global economic weakness that only one in 10 years has seen and only in 1973, 1981, 1982, 2009 and 2020 over the past half century.

In an interview with the Financial Times, Pierre-Olivier Gorenchas, chief economist at the International Monetary Fund, said there is a 15 per cent chance that global growth will eventually fall below 1 per cent. This level will likely meet the stagnation threshold and be “very painful for a lot of people”.

“We are not in a crisis yet, but things are not really looking good,” he said, adding that 2023 would be the “darkest hour” in International Economy.

The financial turmoil, caused by the shift to dollar assets, threatened to compound the economic threat.

“As the global economy heads into stormy waters, financial turmoil may erupt, prompting investors to seek protection for safe-haven investments, such as US Treasuries, and push the dollar higher,” Gorinchas added in his statement accompanying the movement. Report.

Although sharp interest rate increases around the world have been weighing on growth, the International Monetary Fund said they are needed to ensure inflation is back under control and return the global economy to a more stable base.

Bar graph of the IMF's GDP growth forecast in 2023 (%) showing that growth forecasts have been cut across all major economies

The fund expects inflation in advanced economies to reach 7.2 percent this year and 4.4 percent next year, more than one percentage point higher than its previous forecast in April of 2023. For emerging and developing economies, consumer price growth will peak year-on-year. The pace was at 10 per cent this year before declining to 8.1 per cent in 2023.

On the front lines, you have the central banks. This is their job, this is their mission [and] “I heard them all at stake,” Gorinchas said. The Fund said monetary authorities should “keep on track” rather than repeat the mistakes of the 1970s when most monetary policymakers didn’t have the nerve to keep raising interest rates when their economies slowed or faltered.

The IMF acknowledged that there was an opportunity to tighten monetary policy too much, but said the risks of doing too much were not as serious as letting inflation become normal and ingrained in everyday life.

For the US Federal Reserve in particular, Gorinchas warned that it is too early to roll back its aggressive campaign to tighten monetary policy.

“We are far from winning that battle,” the chief economist said, adding that any indication that the Fed will not raise interest rates further could, at this point, be interpreted by financial markets as a sign that policymakers are unprepared. to do what it takes.”

“Inflation expectations can recede and we can have a more consistent process,” he said.

The International Monetary Fund has expanded on its recent criticism of the UK’s economic policy, advising all countries not to pursue too expansionary policies with regard to tax and public spending, despite rising energy and food prices.

Gorinchas said there is a need to cut the deficit and rebuild fiscal buffers. “Doing otherwise will only prolong the struggle to reduce inflation, risk canceling inflation expectations, increase financing costs, and fuel further financial instability, complicating the task of the fiscal, monetary and financial authorities, as recent events have made clear,” he said in his statement.

Comparing it to two drivers, each with their own steering wheels, Goernchas told the Financial Times that opposition to fiscal and monetary policies has prompted financial markets to ask, “What direction is this car going? Are we really fighting inflation or are we really stimulating economic activity?”

In the revised forecasts, 93 percent of countries received a reduction in their growth forecasts.

The forecast for global growth for 2022 has fallen from 4.9 percent in the IMF report a year ago to 3.2 percent now. Growth estimates for 2023 were lowered from 3.6 percent a year ago to 2.3 percent, with cuts focused in advanced economies rather than the emerging world.

In a report that will be difficult for the Beijing government as it prepares for the Communist Party’s 20th National Congress, China’s economy was expected to grow only 4.4 percent this year, well below the government’s growth target of 5.5 percent. The International Monetary Fund expects this annual growth rate to improve to just 4.6 percent over the next five years.

The US economy is expected to stagnate during the four quarters of 2022 and then maintain a sluggish 1 percent growth rate in 2023. The International Monetary Fund has predicted that many European countries will fall into recession, as households and businesses struggle to deal with natural gas prices. . Hit 2021 levels.

The fund was not more optimistic about the future. She added that the cuts were likely to be permanent. The scars from the pandemic and war in Ukraine will make the global economy 4.3 percent smaller in 2024 than projected in January 2020 as the coronavirus begins to spread globally.

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