The IMF’s economic outlook is more bad news, especially for the US, China and Europe
The International Monetary Fund has bad news for the Big Three – the United States, China and the Eurozone – and for the global economy.
“The world could soon teeter on the brink of a global recession, only two years after the last one,” IMF chief economist Pierre-Olivier Gourinchas writes in his latest blog, “Global Economic Growth Slows Amid Gloomy and More Uncertain Outlook “.
Slowing growth and the growing specter of inflation are clouding the global economic outlook. At the same time, the fallout from the ongoing Covid-19 pandemic and the Russian-Ukrainian war continue to haunt the global economic recovery.
But forecasts of economic gloom extending into 2023 were still valid, given the bleak picture painted by IMF chief Kristalina Georgieva in her recent blog.
Big 3 Drag Global Economy
The United States, China and the Eurozone represent around 50% of the global economy. Any economic slowdown in these countries, as Gourinchas points out in his blog, will hamper the global economic recovery.
“Growth is slowing from 6.1% last year to 3.2% this year and 2.9% next year, declines of 0.4 and 0.7 percentage points from April. This reflects slowing growth in the world’s three largest economies,” the blog from the latest World Economic Outlook read.
Inflation in the United States and in the main European economies is a source of concern. The United States, in particular, recorded inflation of over 9% in July, prompting the US Federal Reserve to raise interest rates by 0.75 percentage points for the second consecutive time.
The fight against inflation has been compounded by real fears that the US economy is slipping into recession. The economy contracted for the second straight quarter, shrinking 0.9% over the past three months. In the first quarter, the economy contracted by 1.6%.
In China, continued local lockdowns related to COVID-19 are negatively impacting the economy. According to reports, its economy shrank 2.6% in the April-June quarter. The IMF also cut China’s economic growth rate to 3.3% for 2022, the lowest in four decades. He also revised China’s economic growth forecast for 2023 by 1.3%
“China’s slowdown has been worse than expected amid Covid-19 outbreaks and lockdowns,” the blog post said.
In particular, the ongoing real estate crisis in China could further cripple economic expansion in the coming quarters.
The fallout from the war in Ukraine and its impact on gas prices is likely to be the biggest economic problem for the Eurozone. Gas prices rose 30% in just two days after Russia – the country is Europe’s main energy power – cut off supply to Nord Stream 1.
The centrality of natural gas to the European economy can be summed up in this statement from the European Central Bank’s Economic Bulletin: “Significant increases in natural gas prices can dampen economic activity both through the consumption channel and the intermediate goods channel.
The war in Ukraine and the tightening of monetary policy to fight inflation have forced the IMF to revise its forecast for the euro zone downwards by 2.6% this year and 1.2% in 2023.
Global inflation worries
Fighting inflation seems to be the need of the hour. “Countries must do everything in their power to bring down high inflation,” Georgieva wrote in her recent blog.
According to the July economic outlook, inflation is expected to reach 6.6% in advanced economies and 9.5% in emerging markets, a revision of 0.9 and 0.8 percentage points, respectively.
“Inflation at current levels poses a clear risk to current and future macroeconomic stability, and bringing it back to central bank targets should be the top priority for policymakers,” Gourinchas suggests in his blog post.
The IMF has warned that inflationary risks will slow global economic growth, particularly affecting the United States and the euro zone.
These risks include:
1) Complete shutdown of Russian gas flow, which will cause gas prices to skyrocket in energy-dependent Europe,
2) A spike in debt crises in emerging markets due to tighter financial conditions as central banks fight inflation.
3) Tighter labor markets (especially in advanced countries).
According to IMF estimates, if these risks materialize, the global growth rate will fall to 2.6% and 2% next year, while the United States and the euro zone could experience near-zero growth in 2023. .
A “synchronized monetary tightening” across the world will have real economic costs, writes Gourinchas. Thus, while central banks will seek to control inflation, economic growth could be the victim.
Central banks around the world now face the challenge of a “soft landing” – a popular phrase in the United States for such central bank policy that keeps inflation in check and helps the economy grow. .