IMF cuts 2023 growth outlook amid global shock

WASHINGTON, Oct 11 (Reuters) – The International Monetary Fund on Tuesday lowered its global growth forecast for 2023 amid mounting pressures from the war in Ukraine, high energy and food prices, inflation and interest rates soaring, warning that conditions could worsen significantly next time around. year.

The Fund said its latest forecast for the outlook for the global economy shows that a third of the global economy is likely to contract by next year, marking a sobering start to the first in-person annual meetings. of the IMF and the World Bank in three years.

“The three largest economies, the United States, China and the euro zone will continue to stagnate,” IMF chief economist Pierre-Olivier Gourinchas said in a statement. “In short, the worst is yet to come, and for many people, 2023 will look like a recession.”

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The IMF said global GDP growth next year will slow to 2.7% from a forecast of 2.9% in July, as rising interest rates slow the US economy, the Europe struggles with soaring gas prices and China faces continued COVID-19 lockdowns and weakening. real estate sector.

The Fund maintains its 2022 growth forecast at 3.2%, reflecting stronger than expected production in Europe but weaker performance in the US, following torrid global growth of 6.0% in 2021.

US growth this year will be a meager 1.6% – a drop of 0.7 percentage points from July, reflecting an unexpected contraction in GDP in the second quarter. The IMF kept its US growth forecast for 2023 unchanged at 1.0%.

Eurozone growth will fall to 0.5% next year as high energy prices dampen output, the Fund predicted, with some key economies including Germany and Italy sliding into recession technical. Gourinchas told a news conference that geopolitical shifts in the continent’s energy supply will be “broad and permanent”, keeping prices high for a long time.

On market turmoil in Britain after financial markets rebuked proposed tax cuts, Gourinchas said UK fiscal policy had to be in line with the central bank’s inflation targets.

PRIORITY: INFLATION

The IMF said its outlook was subject to a delicate balancing act by central banks to tackle inflation without over-tightening, which could plunge the global economy into an “unnecessarily deep recession” and cause disruptions in financial markets and suffering for developing countries. But he made it clear that controlling inflation was the top priority.

The International Monetary Fund (IMF) logo is seen outside the headquarters building in Washington, United States, as IMF Managing Director Christine Lagarde meets with Argentine Treasury Minister Nicolas Dujovne on 4 September 2018. REUTERS/Yuri Gripas

“Central banks’ hard-earned credibility could be undermined if they misunderstand stubborn inflation persistence yet again,” Gourinchas said. “That would prove much more detrimental to future macroeconomic stability.”

The Fund expects headline consumer price inflation to peak at 9.5% in the third quarter of 2022, before falling back to 4.7% in the fourth quarter of 2023.

DOWNSIDE SCENARIO

A ‘plausible combination of shocks’, including a 30% rise in oil prices from current levels, could dim the outlook significantly, the IMF said, pushing global growth down to 1.0% next year – a level associated with a significant fall in real incomes.

Other elements of this “pessimistic scenario” include a sharp decline in investment in China’s real estate sector, a sharp tightening of financial conditions caused by depreciating currencies in emerging markets and labor markets that remain overheated, resulting in a decline in potential output.

The IMF estimated a 25% chance of global growth falling below 2% next year – a phenomenon that has happened only five times since 1970 – and said there was more than 10% chance of a contraction in global GDP.

DOLLAR PRESSURES

These shocks could keep inflation high for longer, which in turn could keep upward pressure on the US dollar, at its highest level since the early 2000s. The IMF said this is putting pressure in emerging markets and that the strong dollar could increase the likelihood of debt distress for some countries.

But Gourinchas said the dollar’s strength is currently the result of fundamental economic forces, including more aggressive monetary tightening in the United States, rather than unruly markets.

Emerging market debt relief is expected to be a major talking point among global financial policymakers at meetings in Washington, and Gourinchas said now is the time for emerging markets to “batten down the hatches.” to prepare for tougher conditions. The appropriate policy for most was to prioritize monetary policy for price stability, to let currencies adjust, and to “hold on to valuable foreign exchange reserves in case financial conditions actually deteriorate.”

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Reporting by David Lawder; Editing by Andrea Ricci

Our standards: The Thomson Reuters Trust Principles.

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