The outlook for global growth has grown “gloomy and more uncertain,” the IMF’s chief economist Pierre-Olivier Gourinchas warned Tuesday (July 26) in Washington, DC.
A tentative recovery in 2021 has been followed by increasingly gloomy developments in 2022 as risks began to materialize. Global output contracted in the second quarter of this year, owing to downturns in China and Russia, while US consumer spending undershot expectations. Several shocks have hit a world economy already weakened by the pandemic: higher-than-expected inflation worldwide––especially in the United States and major European economies––triggering tighter financial conditions; a worse-than-anticipated slowdown in China, reflecting COVID- 19 outbreaks and lockdowns; and further negative spillovers from the war in Ukraine.
“The outlook has darkened significantly since April. The world may soon be teetering on the edge of a global recession, only two years after the last one. Multilateral cooperation will be key in many areas from climate transition and pandemic preparedness to food security and debt distress. Amid great challenge and strife, strengthening cooperation remains the best way to improve economic prospects for all and mitigate the risk of geo-economic fragmentation,” Gourinchas said at the launch of the quarterly update of the IMF’s World Economic Outlook report.
The Fund is warning that elevated inflation, rising interest rates, a high US dollar valuation, impact of the war in Ukraine and a slowdown in Chinese growth are all factors leading to a downward revision in the forecast.
“In particular, a full shutdown of Russian gas flows to Europe or inflation pressures remaining more elevated than they've, they've been in the past. And we've been repeatedly surprised by the persistence and the broadening of inflation in recent times, and also an increase in financial tightening around the world. And so if you put all these things together, then we get a global economy as I mentioned in my remarks, that gets close to 2% in 2023, where we think really a lot of the vulnerabilities are where you have a lot of slowdown happening. And so 2% is really a sort of a low number for the global economy. That's a sense in which we're getting close, really close to a global recession,” he explained.
Persistent high inflation in the US and other big economies is leading central banks to hike interest rates. Meanwhile, there is a move to safety of the US dollar which means that emerging markets especially are hit with higher prices while also seeing the cost of servicing their debt increasing. The temptation will be to push off reforms or to raise spending, but the Fund says that action now will head off more pain later.
“What is really important here is that in a sense there is one overwhelming priority at this point, and it is to bring back price stability in advanced economies and in emerging markets as well, that many of them have seen elevated price pressure. And whether we are in the baseline or whether we are in the alternative scenario. And in the alternative scenario, inflation pressures are pushing even higher and there's even more of a need for central banks and policymakers to really address that issue. And this is really critical because it's really necessary to plant the seed for future macroeconomic stability. A stable macroeconomic environment in the future requires that we bring down inflation in the coming year, year-and-a-half,” he answered.
Gourinchas also said that there is still a path to a ‘soft landing’ in the US, meaning where the Federal Reserve is able to head off a recession through calibrated action.
“The current environment suggests that the likelihood that the US economy can avoid a recession is actually quite, quite narrow. Under our current projections, for instance for the US the quarter... Q4 on Q4 growth rate in 2023 is only 0.6%. And 0.6%, that's under our baseline. So you see that a small shock at this point could be enough to sort of knock off the US economy of a fairly low number and sort of tilt it over into recession. So it's a very narrow, it's a very narrow path at this point,”
A full copy of the report can be found at World Economic Outlook (imf.org)