IMF Warns ‘Worst Is Yet To Come’

imf-warns-‘worst-is-yet-to-come’

The International Monetary Fund lowered the global growth projection for next year and warned that the world economy is set to witness more pain next year.

The global lender cut the growth projection for next year to 2.7 percent from 3.3 percent, while it retained the outlook for this year at 3.2 percent after a 6.0 percent expansion in 2021.

“This is the weakest growth profile since 2001 except for the global financial crisis and the acute phase of the COVID-19 pandemic and reflects significant slowdowns for the largest economies,” IMF said in the foreword to the latest World Economic Outlook report, released Tuesday.

Roughly a third of the world economy faces two consecutive quarters of negative growth, the lender said.

“Overall, this year’s shocks will re-open economic wounds that were only partially healed post-pandemic,” IMF Economic Counsellor Pierre-Olivier Gourinchas said in his blog on the IMF website.

“In short, the worst is yet to come and, for many people, 2023 will feel like a recession.”

Gourinchas said the global economy continues to face steep challenges, shaped by the Russian invasion of Ukraine, a cost-of-living crisis caused by persistent and broadening inflation pressures, and the slowdown in China.

The three largest economies, the United States, China, and the euro area will continue to stall, he added.

The IMF forecast global inflation to climb to 8.8 percent this year from 4.7 percent last year. The pace of price growth is projected to decline to 6.5 percent next year and to 4.1 percent by 2024.

“Upside inflation surprises have been most widespread among advanced economies, with greater variability in emerging market and developing economies,” the IMF report said.

Risks to the outlook remain unusually large and to the downside, and monetary policy could miscalculate the right stance to reduce inflation, the IMF warned.

However, the front-loaded and aggressive monetary tightening is critical to avoid inflation de-anchoring as a result of households and businesses basing their wage and price expectations on their recent inflation experience, the report said.

Fiscal policy should continue to give targeted support to vulnerable groups, at the same time it should remain tight enough not to derail monetary policy, the IMF said.

The WEO report projected growth slowing to 1 percent next year in the U.S., thanks to the monetary tightening and financial conditions.

Eurozone is expected to witness the most pronounced slowdown as the energy crisis caused by the war in Ukraine continue to take a heavy toll, damping growth to 0.5 percent in 2023.

Within the euro area, Germany and Italy are forecast to see economic contractions next year.

The 2023 growth projections for the UK was lowered to 0.3 percent and that for Japan to 1.6 percent.

The IMF slashed China’s growth forecast for next year to 4.4 percent due to a weakening property sector and continued lockdowns.

India’s growth forecast for the financial year ending March 31, 2023, was sharply cut by 0.6 points to 6.8 percent, while the projection for next fiscal was retained at 6.1 percent.

The downgrade reflected a weaker-than-expected outturn in the second quarter and more subdued external demand.

The global surge in food and energy prices is set to drive global inflation to a peak of 9.5 percent this year before decelerating to 4.1 percent by 2024.

Inflationary pressures are proving to be more broader and more persistent than anticipated, the IMF said.

“Central banks need to keep a steady hand with monetary policy firmly focused on taming inflation,” Gourinchas said.

The IMF official warned that the hard-won credibility of central banks could be undermined if they misjudge, yet again, the stubborn persistence of inflation.

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