IMF cuts growth forecast for 2023 as global shocks collide

WASHINGTON (Reuters) – The International Monetary Fund on Tuesday cut its global growth forecast for 2023 amid colliding pressures from the war in Ukraine, soaring energy and food prices, inflation and soaring interest rates, warning that conditions could worsen dramatically in the future. general.

The fund said its latest global economic outlook shows that a third of the global economy is likely to shrink by next year, marking a realistic start to the first in-person annual meetings of the International Monetary Fund and the World Bank in three years.

“The three largest economies, the United States, China and the eurozone will continue to falter,” IMF chief economist Pierre-Olivier Gorinchas said in a statement. In short, the worst is yet to come, and for many people, 2023 will feel stagnant.

The International Monetary Fund said global GDP growth next year will slow to 2.7%, compared to a 2.9% forecast in July, as high interest rates slow the US economy, Europe struggles with high gas prices, and China struggles with the continued COVID-19 lockdown and weakness. real estate sector.

The fund maintains its growth forecast for 2022 at 3.2%, reflecting stronger-than-expected production in Europe but a weaker performance in the United States, after global growth of 6.0% in 2021.

Growth in the US this year will be a meager 1.6% – a 0.7 percentage point drop from July, reflecting an unexpected contraction in gross domestic product in the second quarter. The International Monetary Fund kept its forecast for US growth for 2023 unchanged at 1.0%.

The fund forecast eurozone growth to fall to 0.5% next year as high energy prices for production decline, with some major economies, including Germany and Italy, entering technical recessions. Gorinka told a news conference that geopolitical shifts in the continent’s energy supply would be “widespread and permanent”, keeping prices high for a long time.

Regarding the market turmoil in Britain after financial markets criticized the proposed tax cuts, Gourinchas said Britain’s fiscal policy should be in line with the central bank’s inflation targets.

Priority: Blowing

The IMF said its forecasts are subject to a careful balancing act by central banks to combat inflation without over-tightening, which could push the global economy into an “unnecessarily severe recession” and cause turmoil in financial markets and hurt developing countries. But she directly pointed to controlling inflation as the biggest priority.

“The hard-earned credibility of central banks could be undermined if they once again misjudge the persistence of stubborn inflation,” Gourinchas said. “This would do much more harm to macroeconomic stability in the future.”

The fund projected that core consumer price inflation would peak at 9.5% in the third quarter of 2022, declining to 4.7% by the fourth quarter of 2023.

side scenario

The International Monetary Fund said a “reasonable set of shocks,” including a 30% rise in oil prices from current levels, could make the outlook largely bleak, sending global growth down to 1.0% next year – a level linked to lower incomes. real wide.

Other components of this “bearish scenario” include a sharp decline in investment in the Chinese real estate sector, a sharp tightening of financial conditions caused by currency depreciation in emerging markets, and continued overheating of labor markets leading to potential production declines.

The International Monetary Fund put a 25% chance that global growth will fall below 2% next year – a phenomenon that has occurred only five times since 1970 – and said there is a 10% higher chance of a global GDP contraction.

dollar pressure

These shocks could keep inflation high for a longer period, which in turn could lead to continued upward pressure on the US dollar, which is now at its strongest since the early 2000s. This is putting pressure on emerging markets, and a stronger dollar could raise the possibility of a debt crisis for some countries, the IMF said.

But Gorenchas said the dollar’s strength at the moment is a result of fundamental economic forces, including more aggressive monetary tightening in the United States, rather than wild markets.

Emerging market debt relief is expected to be a major topic of discussion among global financial policy makers in Washington meetings, and Gorinchas said it is time for emerging markets to “tighten the screws” to prepare for more challenging conditions. The appropriate policy for most people was to prioritize monetary policy for price stability, to allow currencies to adjust and to “preserve valuable foreign exchange reserves when financial conditions really worsen”.

(Reporting by David Lauder) Editing by Andrea Ricci

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