The International Monetary Fund has told central banks to “stay the course” in their fight against inflation, despite warning that a third of the global economy will be in recession next year.
In its half-yearly update, the Washington-based IMF said the “worst was yet to come”. It cited a combination of cost of living pressures, Russia’s invasion of Ukraine and a slowdown in China as important factors behind a fresh growth downgrade.
Pierre-Olivier Gourinchas, the IMF’s economic counsellor, said storm clouds were gathering but insisted central banks needed to maintain their “laser focus” on defeating inflation or risk the need for even tougher action later if upward price pressures became embedded.
Gourinchas said the IMF, like central banks, had underestimated the strength of inflationary pressures when they first emerged in 2021, but said there had since been a “rapid and synchronised tightening of monetary conditions, alongside a powerful appreciation of the US dollar against most other currencies”.
The US, the EU and the UK have reported inflation reaching levels not experienced since the early 1980s and Gourinchas said price pressures were proving “quite stubborn”.
He added: “The risk of monetary, fiscal or financial policy mis-calibration has risen sharply at a time when the world economy remains historically fragile and financial markets are showing signs of stress.”
The US central bank, the Federal Reserve, has raised interest rates by 0.75 points at its last three meetings, while the Bank of England has raised borrowing costs from 0.1% to 2.25% since last December.
Gourinchas said the danger of doing too little outweighed the cost of doing too much, but said central banks still needed to be careful. “Over-tightening risks pushing the global economy into an unnecessarily harsh recession,” he said.
The IMF’s half-yearly world economic outlook (WEO) estimated that global growth will slow from 6% in 2021 to 3.2% this year and 2.7% in 2023. The prediction for 2022 is 0.4 percentage points lower than six months ago but unchanged on an updated forecast made in July.
For 2023, growth has been downgraded by 0.9 points since April and by 0.2 points since July. The outlook for 2023 is weaker for 143 countries – representing 92% of global output – than it was six months ago.
More than a third of the global economy will contract in 2023, while the three largest economies – the US, the EU and China – will continue to stall,” Gourinchas said in the WEO’s foreword. “In short, the worst is yet to come, and for many people 2023 will feel like a recession.”
Russia’s invasion of Ukraine was continuing to destabilise the global economy, Gourinchas added. “Beyond the escalating and senseless destruction of lives and livelihoods, it has led to a severe energy crisis in Europe that is sharply increasing costs of living and hampering economic activity,” he said.
Germany and Italy – both heavily reliant on Russian energy – are expected to experience shrinking in their economies next year, by 0.3 and 0.2 points respectively, while France is expected to post growth of 0.7%.
Of the other G7 countries, Japan is expected to post the strongest growth (1.6%) followed by Canada (1.5%) and the US (1%). The UK is forecast to grow by 0.3%. China, affected by tough Covid lockdown restrictions and a weakening property market, is forecast to more than halve its growth rate from 8.1% in 2021 to 3.2% this year before picking up to 4.4% in 2023.
