The global economy is caught in a storm of shocks and uncertainties as it tries to recover from COVID-19, according to the IMF, which on Tuesday downgraded its growth forecasts and warned of the many risks on the horizon.
“The global economy, still reeling from the pandemic and the Russian invasion of Ukraine, faces an increasingly bleak and uncertain outlook,” observes the International Monetary Fund’s chief economist Pierre-Olivier Gourinchas in a blog post.
“Many risks” mentioned by the IMF in its latest April forecast “have started to materialize,” he warns, and “the world may soon find itself on the brink of a global recession, just two years after the last one.
Global growth is now expected at just 3.2% in 2022, down 0.4 points from April’s forecast, reflecting “the slowdown in growth in the world’s three largest economies – the United States, China and the eurozone – reflected with significant implications for the global outlook,” notes Gourinchas.
The growth forecast for the United States for this year is lowered by 1.4 points to 2.3% compared to April.
And the likelihood of the world’s largest economy escaping recession is now slim, Gourinchas warned at a news conference: “The current environment suggests that the chance of the United States escaping recession is slim. In fact (…) it is a very narrow path”.
China recorded “a slowdown that was worse than expected” with forecast growth of 3.3% (-1.1 points) due to Covid-19-related closures and a “worsening housing crisis”.
For the euro zone, the growth forecast was lowered by 0.2 points to 2.6%, weighed down by Germany, France and Spain, among other things as a result of the war in Ukraine.
Russia, on the other hand, which is facing a wave of international sanctions, should do better than expected in 2022, seeing its GDP collapse by 6%, not the 8.5% expected three months ago after the severe recession,” commented the chief economist.
It is a bleak picture that the IMF paints in its report.
Prices continue to rise worldwide. Global inflation is expected to reach 8.3% this year (+0.9 points from April forecast). The war in Ukraine has pushed up food and energy costs, which is particularly hard on the poorest sections of the population.
In light of this, central banks, including the Fed in the United States and the ECB in Europe, have started to turn off liquidity to restrain consumption and ease pressure on prices.
And they must go further, “because there is a need to sow the seeds of future macroeconomic stability,” commented Pierre-Olivier Gourinchas.
But that will not be without its difficulties: “Tighter monetary policy will inevitably have economic costs, but any delay will only compound them”.
To protect the most vulnerable populations, “targeted budget support (by governments) can help cushion the impact” but must not increase public debt as interest rates have risen, Bretton Woods warns.
For 2023, the global forecast falls even further and loses 0.7 points to 2.9%, which is mainly due to the consequences of the fight against inflation.
And the reality could be even worse, as the risks weighing on the economy are numerous.
The war in Ukraine could push up energy prices, and “a complete halt to Russian gas exports to European economies in 2022 would significantly increase global inflation.”
The fight against inflation could prove to be “more costly than expected”, stresses the IMF, noting that “the risk of a recession in 2023 is particularly high”.
And the tightening of financing conditions could lead to over-indebtedness in emerging and developing countries due to rising interest rates.
Global growth, which had slowed by 3.1% in 2020 due to the impact of COVID-19, had recovered by 6.1% in 2021.