February 9, 2023

The IMF has lowered its global growth forecasts and raised its inflation forecasts, warning that risks to the economic outlook are “overwhelmingly downside”.

The lowered estimates, released Tuesday, come as the world grapples with the fallout from Russia’s invasion of Ukraine, protracted disruptions caused by the pandemic and rapidly tightening financial conditions, with central banks trying to contain rising prices.

The fund now expects gross domestic product growth to slow to 3.2 percent in 2022, down 0.4 percentage points from April’s estimate and about half of last year’s growth rate. In 2023, global growth will weaken further to 2.9 percent. Just three months ago, that estimate was 0.7 percentage point higher.

Global inflation is likely to pick up, with the IMF raising its forecasts for this year and next by nearly a full percentage point to 8.3 percent and 5.7 percent, respectively.

The multilateral lender said the economic outlook had become both much bleaker and “extremely uncertain,” with inflation at historic peaks and growing challenges to growth.

Pierre-Olivier Gourinchas, the IMF’s top economist, warned in an interview that it will also be an environment that will test the “courage” of central banks around the world to continue raising interest rates in an attempt to restore price stability even if the economy slows ,

“We are here at a very critical time,” he said. “It’s easy to cool down the economy when the economy heats up. It is much more difficult to cut inflation when the economy is close to a recession.”

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The risk of a recession is “particularly high” in 2023, as growth is expected to bottom out in several countries next year, savings accumulated during the pandemic will have dwindled and “even small shocks can cause economies to stagnate.” “.

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One ‘plausible’ scenario the fund has mapped is a sharp decline in Russian energy exports, including a complete cessation of the country’s gas supplies to Europe, which would further slow growth and create new price pressures.

But Gourinchas stopped labeling the upcoming economic environment as “stagflationary,” akin to the 1970s, and argued that central banks have much more credibility now than they did then. However, he said that “the risk of us having a global recession has increased” [and] inflation will remain more persistent than we expected”.

Charts showing sequential global inflation forecasts from the IMF

More pessimistic growth forecasts have prompted cuts in the world’s largest economies.

Hampered by extensive Covid-19 lockdowns, the Chinese economy is set to grow just 3.3 percent this year, 1.1 percentage points less than expected in April and the lowest growth rate in more than four decades, excluding the 2020 shock.

For the US, growth from last year is projected to more than halve at 5.7 percent to 2.3 percent by 2022, before falling further to just 1 percent the following year as rising inflation affects households’ ability to to buy goods and services, consumption is ebbing and the Federal Reserve’s historically aggressive campaign for monetary tightening is starting to bite.

Compared to the April forecast, the new estimates are each more than 1 percentage point lower.

After adjusting for inflation, ‘real’ GDP growth in the US of only 0.6 percent year-on-year is expected in the fourth quarter of 2023. you could call it a technical recession,” said Gourinchas.

He added that emerging markets have become a major concern as the Fed’s tightening cycle drives up borrowing costs globally. While the “disorderly” conditions in the financial markets had not yet taken root, he said, the big joker was how much additional pressure economies can withstand.

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Emerging markets are likely to come under even more pressure if the fund’s alternative scenario of a sharp decline in Russian oil and gas exports materializes, with inflation expectations rising and forcing central banks to tighten monetary policy even more aggressively .

Under those circumstances, global growth is expected to decline to just 2.6 percent and 2 percent, respectively, in 2022 and 2023. It has fallen below 2 percent only five times since the 1970s, according to the fund.

Charts showing economic headwinds intensifying under the IMF's alternative scenario

Europe, already forecasting much lower growth this year than previously forecast, would also be disproportionately affected. The IMF had already lowered its forecasts to growth of 2.6 percent in 2022 and 1.2 percent in 2023, with the outlook for Germany significantly lower than forecast in April. Next year, the economy is expected to grow by just 0.8 percent.

A halt to Russian gas exports could cut another 1.3 percentage points from Europe’s growth forecast for 2023, resulting in ‘near-zero regional growth’.

That will likely pose more problems for the European Central Bank, which is already facing challenges such as raising interest rates to fight inflation without sparking another eurozone debt crisis.

Gourinchas said a bond-buying tool unveiled by the ECB last week could potentially have a “very big calming effect” on markets, but said it would be a “delicate exercise” to execute.