In its forecasts published on Tuesday, the International Monetary Fund identified seven “particularly worrying” risk factors, the occurrence of which could lead to a “worst-case scenario”: one of the worst economic crises in five decades.
• Also read: Labor shortages continue in eastern Quebec
• Also read: The United States “will not experience a recession,” says Joe Biden
War in Ukraine and energy prices
According to the IMF, there is “a lot of uncertainty” about the level of Russian gas supplies to Europe for 2022 and 2023. Since April, a 40% year-on-year decline has already been observed.
The report also calls for a complete halt to Russian gas exports, which would force European countries to introduce energy rationing, affecting major industries.
Such a scenario would “significantly” reduce growth in the euro area in 2022 and 2023, with a “cross-border” echo.
persistence of inflation
While inflation is “generally expected” to return to pre-pandemic levels by the end of 2024, further supply disruptions could cause inflation to solidify, the IMF said.
With sufficiently large shocks, there is a risk of creating a situation of “stagflation”, in which the recession is accompanied by high inflation.
The IMF fears that central banks are trying too hard to counteract inflation.
By not choosing the right benchmark for interest rates, central banks would expose their economies to an excessive fall in demand.
“The risk of recession is particularly high in 2023,” analyzes the report.
emerging market debt
As interest rates rise in advanced economies, the cost of borrowing will be higher around the world and there is a risk that national currencies will depreciate significantly against the dollar.
According to the IMF, such a risk would also occur at a time when the financial situation of many countries was already “strained”.
The institution estimates that 60% of low-income countries are at risk or already in debt trouble. Ten years ago it was around 20%.
Getting bogged down in China
The first half of 2022 was marked by numerous restrictive anti-Covid measures in China, which seriously disrupted the country’s manufacturing activity, especially and therefore global activity.
A new outbreak of the epidemic, accompanied by the Chinese government’s zero-Covid policy, could cause China’s economic slowdown to stall, which could lead to “significant repercussions on a global scale,” according to the IMF, which is also a crisis-related risk mentioned in the Chinese real estate sector.
Civil unrest and famine
Since spending on food and energy are essential household expenses and cannot be replaced, the current inflationary situation “poses a threat not only to economic stability but also to social stability,” the IMF points out.
“The link between price and social stability means that additional trade barriers or a poor harvest due to extreme heat and fertilizer shortages are likely to cause more suffering, famine or civil unrest,” the document said.
fragmentation of the world economy
With the war in Ukraine, the IMF warns of a “serious risk for the medium-term perspective”: a fragmentation of the global economy into geopolitical blocs with glaring differences in technological standards, international payment systems and reserve currencies.
“Fragmentation could also reduce the effectiveness of multilateral cooperation in responding to climate change, with an added risk that the current food crisis could become the norm,” the IMF concludes.