The International Monetary Fund downgrades its outlook for the global economy for 2023, citing a long list of threats that include Russia’s war on Ukraine, chronic inflationary pressures, steep interest rate hikes and lingering consequences of the pandemic.
The 190-country lending agency predicted on Tuesday that the global economy will grow by just 2.7% next year, down from the same July forecast of 2.9%. The IMF left unchanged its forecast for international growth for the current year — a modest 3.2%, a sharp deceleration from last year’s 6.0% expansion.
And “the worst is yet to come,” said IMF chief economist Pierre-Olivier Gourinchas.
Three major economies — those of the United States, China and Europe — are at a standstill. Countries accounting for a third of global output will see their economies shrink next year, suggesting that 2023 will “look like a recession” for many people around the world, he said on Tuesday.
In its latest estimates, the IMF lowered its growth outlook for the United States to 1.6% this year, down from a forecast of 2.3% in July. He expects meager growth of 1.0% in the United States next year.
The organization predicts that China’s economy will only grow 3.2% this year, after growing 8.1% last year. Beijing instituted a draconian zero-COVID policy and cracked down on excessive home lending, disrupting business activity. China’s growth is expected to accelerate to 4.4% next year, which is still subdued by Chinese standards.
The group of 19 European countries that share the euro, reeling from crushing energy prices caused by Russia’s attack on Ukraine and Western sanctions on Moscow, will only grow by 0, according to the IMF. .5% in 2023.
A costly pandemic recovery
The global economy has been on a frantic ride since COVID-19 hit in early 2020. First, the pandemic and the lockdowns it generated crippled the global economy in the spring of 2020. Second, vast injections of government spending and ultra-low interest rates put in place by the US Federal Reserve and other central banks have fueled a surprisingly strong and rapid recovery from the pandemic recession.
But the revival came at a high cost. Factories, ports and freight yards have been overwhelmed by strong consumer demand for products made, particularly in the United States, leading to delays, shortages and price hikes.
The IMF expects global consumer prices to rise 8.8% this year, up from 4.7% in 2021.
In response, the Fed and other central banks reversed course and began to raise interest rates dramatically, risking a sharp downturn and potentially a recession. The Fed has raised its short-term policy rate five times this year. Higher rates in the United States have diverted investment from other countries and strengthened the value of the US dollar against other currencies.
Outside the United States, the rise in the dollar makes imports sold in American currency more expensive, including oil, and thus increases global inflationary pressures. It also forces foreign countries to raise their own interest rates — and burden their economies with higher borrowing costs — to defend their currencies.
Maurice Obstfeld, a former IMF chief economist who now teaches at the University of California, Berkeley, warned that overly aggressive action by the Fed could “send the global economy into an unnecessarily severe contraction”.